Tag Archives: business management

Financial Markets as Prone to Rumors

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Rumors can be a means of social control to help some individuals, a group, an organization or an institution to achieve a certain objective.  In this case, a rumor can be an instrument of various groups, business organizations, political parties and other institutions to fight in order to achieve the interests. Thus, rumor has an instrumental purpose. It can become an effective means of control of social groups and social behavior as well as a means of support to a group’s identity and stability (Valdas, 2009). They also give a sense of control for traders in unpredictable financial markets.

“It’s really just a combination of illiquidity, the usual rumors about some firm on the verge of collapse, and the holiday,” a trader at a Western securities company in Tokyo said. The rumors of hedge- fund trouble are “nothing that I can substantiate, just smoke and mirrors, but it sends people running for cover where they can. The market’s extremely illiquid and subject to wild swings on the thinnest of rumors (Arnold, 2008).”

“Rumors can be viewed as a substitute for news.  When there is a lack of news in financial markets, future projections are created to fill in gaps of information.  When these projections are communicated within the investing community, a rumor is born.  This is the classic way in which rumors are created.  (Schindler, 2007). For example, if a CEO says that their company is interested in merging with another, but does not designate with whom, rumors may develop.  These substitutes for news will evolve and spread throughout the market if the information they provide is stimulating and of major importance.  According to Schindler (2007), there are two ways in which rumors are analyzed by behavioral finance.  One is at the individual level in which the procedure is taken to make an investment decision is analyzed.  The other is the aggregate or market level which focuses on how irrational behaviors by investors lead to disproving the Efficient Market Hypothesis” (Karasidis, p.5).

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Schindler (2007,) explained why financial markets are susceptible to rumors. All actions on the trading floors are based on news. Getting information is crucial in gaining profit for traders in financial markets. In the absence of real information about the market, traders often grab any improvised news or rumors to guide their trading decisions. Since time is of the essence and traders are always in pressure to make swift financial decisions, verifying the truthfulness of financial rumors proved to be difficult. Thus, traders tend to take rumors as news. Owing to the lack of time, their only concern is the reliability of the source of rumors and not for their content. Since they are under pressure to trade to earn a profit, traders oftentimes grab rumors as news. If he doesn’t trade, he loses money if the rumors turn out to be true (Schindler, 2005, 19).

A study by Werner and Murray (2004) confirmed the influence of rumors in the market. It showed that a positive rumor usually leads to a positive return on the following trading day, while a negative message leads to a negative return on the following trading day. Another study by Kiymaz (2001), examining good and bad rumors, also showed that  good rumors on the market generate abnormal returns beginning four days before their publication, while the effect of negative rumors begins only after publication. Wysocki (1999) also found increasing returns and trade values the day following the rumor, especially when it is published at night while markets are closed.

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The Social Use of Rumors in Business Firms

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The prevalence of rumors in a business firm indicates a corporate communication crisis. Rumors are difficult to trace and almost impossible to stop. It takes a concentrated effort to dispel them. If remain unchecked, rumors can undermine company morale and, eventually, productivity.  And the primary weapon in putting an end to unwarranted rumors in the company is effective communications. The company story must be put across in a positive light.  The media appreciates quick, accurate, and thorough responses, which should be provided. Staff members should also be used to spread the truth. Other potential allies can be contacted and persuaded to help. The best way to dispel a rumor is to establish a policy regarding the problem and let everyone involved know about it (Horton, 1983).

 “Rumors are common in any organization. Some rumors are destructive and may cause considerable stress, sidetrack the work of key people, or damage the image of an organization. Associations are as vulnerable to rumors as corporations. The environment is especially vulnerable to rumors because so many meetings are held with results that are not made public” (William, 1985).

Rumors are a form of informal company communication. Studies have shown that informal lines of communication, such as rumors, must be kept open because they are a vital part of any organization. Rumors provide feedback to employees and to management; they also justify feelings about situations and help individuals understand the way they feel about certain things (Schaeffer, 1984).

In his studies of the role of rumors in companies, Larry Hirschhorn concluded that rumors have a strong positive role to play in keeping an organization healthy. When rumors are going around, they provide important clues as to what is happening in the company and act as a safety valve to relieve tensions and worries. If people stop spreading rumors, it implies that the workplace reality is so grim that they build psychological barriers to distance themselves from it.  A lack of rumors is a sign of sharp demoralization of a business organization (Hirchhorn cited in Bensahel, 1982).

Managers should pay attention to rumors. By listening to rumors, it does not always mean that they are true. Rumors deal with the internal affairs of the company. Even if they are false, they often reveal the concerns of insecurity, uncertainty or worry among employees. A good manager can prevent many internal crises if they are addressing the concern reflected in rumors (Adler, 1977).

It has been hypothesized that an organization’s culture may affect the propensity to engage in rumors. “In some organizations, the culture may advocate considerable formal communication while informal communication may, at the same time, be discouraged (Kurland and Pelled, 2000, p. 434). In this case, an anti-rumor or gossip culture may cause individuals to refrain from seeking information from sources other than officially sanctioned ones” (Michelson and Mouly, 2004, p. 195).

An exhaustive review of the literature identified fours motivations for consumers to share rumors in the marketplace. It included anxiety management motivation, information sharing motivation, relationship management motivation and self-enhancement motivation (Sudhir and Unnithan, 2014).

Rumors are always present in a business firm. The role of the manager is not to eliminate them, but to learn from them in order to improve the company’s human resource and information management system in order to achieve corporate goals!

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