Power of Asking Questions : Resolving Financial Market Rumors Through Public Inquiries
Should regulators require that firms confirm or deny rumors publicly? In a sequential trading model, such regulation might enhance pricing efficiency through two mechanisms: (i) an increase in the number of informed traders as a result of the public inquiry and (ii) a shortened information advantage period. However, data from rumordisclosure events on the Korea Exchange show that it reduces fairness: informed traders earn higher profits than they do in the absence of the regulation from an increase in noise trading and false alerts. Disclosure of rumor alerts investors to uncertain information, drawing their attention and leading to unintended consequences