eJournal of Multinational Financial Management 11 2001 105 – 115
The effects of stock market rumors on stock prices: evidence from an emerging market
Halil Kiymaz
Finance and Economics-SBPA, Uni6ersity of Houston-Clear Lake, Houston, TX
77058
, USA Received 5 June 1999; accepted 18 February 2000
Abstract
The purpose of this study is to investigate the effects of stock market rumors on the prices of stocks traded at the Istanbul Stock Exchange. The sample consists of 355 favorable
rumors mentioned in the HOTS column of ‘Ekonomik Trend’. While positive significant abnormal returns are observed in each of the 4 days prior to the publication date, negative
insignificant abnormal returns are detected in the post-publication period. The findings in the pre-publication period refute the strong form of market efficiency while the findings in the
post-publication period suggest that investment decisions based on the published rumors would not benefit investors. A further analysis based on the content of rumor shows that
earning expectations’ rumors, and purchases by foreign investors rumors generate greater impact on stock prices than other rumors. © 2001 Elsevier Science B.V. All rights reserved.
JEL classification
:
G14; G15 Keywords
:
Stock market rumors; Emerging market; Istanbul stock exchange www.elsevier.comlocateeconbase
1. Introduction
Although the behavior of stock market prices has been investigated extensively, the question of whether trading based on a particular set of information can lead
investors to obtain excess returns remains as an interesting topic to study. Studies investigating effects of analysts’ recommendations or rumors on stock prices are
Tel.: + 1-281-2833208; fax: + 1-181-2833951. E-mail address
:
kiymazcl.uh.edu H. Kiymaz. 1042-444X01 - see front matter © 2001 Elsevier Science B.V. All rights reserved.
PII: S 1 0 4 2 - 4 4 4 X 0 0 0 0 0 4 5 - 1
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
