A Study On The Effectiveness Of Listed Companies’ Clarification Announcements

Rumors exist everywhere, and the stock market is no exception. They jolt the stock market and disrupt the normal order of it. These can harm the interests of listed companies and investors. Therefore, a special clarification announcement system has been built in the Chinese stock market. Listed companies can utilize clarification announcements to release rumor-related information to investors, which is hoped to eliminate the fluctuation caused by rumors. But in reality, it often happens that clarification announcements do not work. Based on the above mentioned, this paper analyzed the market reaction to rumors and clarification announcements, and then defined the effectiveness of clarification announcements and explored the factors on it, considering the points of view of effectiveness and behavioral finance theories.In this paper, I took a sample of 822 clarification announcements from Shanghai and Shenzhen’s A Share Markets between 2011 and 2013. I extracted some relevant information from these clarification announcements and then analyzed the market reaction to rumors and clarification announcements by using the method of event study. On this basis, this paper defined the effectiveness of clarification announcements according to the value of cumulative abnormal returns before and after the publication of announcements, then built a logistic regression model to explore the factors that may affect the effectiveness of clarification announcements. In addition, this paper also examined the overreaction/underreaction of clarification announcements. The results are:(1) the effectiveness of clarification announcements could be affected obviously by announcement timeliness, announcement detailedness, rumor’s nature, type of rumors and the size of listed companies. (2) The effect of overreaction and underreaction is verified. The stock market overreacts to the clarification announcements that deny good rumors. Meanwhile, it underreacts to the clarification announcements that deny bad rumors. (3) Negativity bias is found when investors process the information of rumors and clarification announcements. In the case of bad rumors with denying clarification, investors are more concerned about bad rumors, resulting in the ineffectiveness and underreaction of clarification announcements; in the case of good rumors with denying clarification, investors care more about the announcements, resulting in the eUmination of the market fluctuation. According to the managerial implications from the results, the author suggests that (1) regulators need to strengthen the system construction of clarification announcement; (2) listed companies should public clarification announcements timely and release real information about rumors; (3) investors should evaluate all information they have, then rationally adjust the investment strategies when facing rumors and clarification announcements.