mainly related to the market efficiency hypothesis. The strong form of the efficient market hypothesis assumes that all information, whether public or private, is
rapidly incorporated into security prices that no investor can use it to earn excess returns. Although the initial studies i.e. Diefenback, 1972; Logue and Tuttle, 1973
argue that information based on market rumors does not have any economic value, later studies report statistically significant stock price reactions to stock market
rumors. The majority of studies in literature seem to refute the market efficiency hypothesis in its strongest form. These studies document the existence of significant
abnormal returns following analysts’ recommendations or rumors. Among them Lloyd-Davies and Canes 1978, Syed et al. 1989, Liu et al. 1990, Barber and
Loeffler 1993 report abnormal stock price performance following recommenda- tions reported in the Dartboard column of the Wall Street Journal WSJ.
The objective of this study is to investigate whether stock market rumors have any impact on common stocks traded at the Istanbul Stock Exchange ISE by
examining the ‘Heard on the Street’ HOTS column of ‘Ekonomik Trend’ ET weekly. Furthermore, the impact of the content of the rumors on stock prices is
investigated. The results of this study provide additional international evidence on effects of rumors on stock prices. The empirical findings show the existence of
positive and significant abnormal returns in each of the 4 days prior to the publication date, and negative insignificant abnormal returns in the post-publica-
tion period. These results suggest that rumors and gossips contained in the HOTS column have been disseminated prior to their publication. A further analysis based
on the content of rumor reveals that the earning expectation rumors and purchases by foreign investors rumors generate greater impact on stock prices than other
rumors.
2. Literature review
The question of whether trading based on recommendations andor rumors published in newspaper or magazines would benefit investors has been investigated
extensively. The empirical studies in this subject report mixed results. Diefenback 1972 and Logue and Tuttle 1973 are two initial studies reporting that analysts’
recommendations have no value for investors. Later studies, on the other hand, report that information provided by the Wall Street Journal Heard on the Street
column or analysts contain valuable information to investors. Lloyd-Davies and Canes 1978 focus on financial analysts’ recommendations as discussed in the
HOTS column of the WSJ. They report that buy recommendations provide significant positive abnormal returns, while sell recommendations are associated
with significant negative abnormal returns on the day of publication. They conclude that analysts and investment advisors provide valuable service to investors. Liu et
al. 1990 extend the Lloyd-Davies and Canes 1978 study with more recent sample and further analyze the effects of the single-company versus multi-company recom-
mendations, and the trading volume around the publication day. Their findings are in the line with the Lloyd-Davies and Canes 1978 study. Moreover, the results
indicate that investors respond earlier to the information and single company recommendations have greater impact on the stock prices than those of multi-com-
pany recommendations. Finally, they report higher trading volume around the publication day.
There are also studies investigating the factors influencing the magnitude of stock market reaction to analysts’ information or recommendation provided by various
publications. Beneish 1991 investigates explanations for the significant stock price reaction to analysts’ information reported in the ‘HOTS’ column of the WSJ. The
results indicate that market reaction persists after controlling for confounding releases. Furthermore, stock prices adjust prior to publication when recommenda-
tions are reported on a single firm. Huth and Maris 1992 examine the same issue in terms of the usefulness of recommendations in short term trade decision making
and firm size. The findings indicate that information obtained from the HOTS column can produce statistically significant stock price movements. Firm size is
found to be important only for negative comments in the column. Barber and Loeffler 1993 analyze the stock price and volume behaviors using recommenda-
tions published in the Dartboard column of the WSJ. They report average positive abnormal returns of 4 in 2 days following the publication. Furthermore, average
volume doubles normal volume level in the same period.
More recently, Mathur and Waheed 1995 investigate the stock price behavior of firms that are favorably mentioned in the ‘Inside Wall Street’ column of Business
Week. The results reveal the existence of positive significant abnormal returns on the day before the publication date, the publication date, and 2 days after the
publication date. The study suggests that information provided by the column is valuable to short term traders if transaction costs are low. Moreover, the results
indicate that investors who invest long term based on the information obtain rate of returns below market returns.
In general, the studies on stock market rumors or analysts’ recommendations support the view that information provided to investors is valuable. This paper
aims to investigate the effects of stock market rumors on stocks traded at the ISE to provide evidence from an emerging market.
3. Data and methodology
