Term Paper on "Financial Rumors"

Term Paper 6 pages (1618 words) Sources: 1+

[EXCERPT] . . . .

FINANCIAL RUMORS' AFFECTS on STOCK PRICES

Spreading Rumours

In the stock market, "Spreading rumours in a bid to drive down the price" constitutes a crime. (Jamieson, 2008a) Even though "traders caught circulating false rumours are liable to a range of sanctions including bans on trading, fines and imprisonment for up to seven years," rumours routinely spread and influence the stock market. A share price can be affected, Jamieson (2008b) points out, not only by individuals verbally starting and spreading financial rumours, but also by people sharing rumours through e- mails, in internet chat rooms or by posting comments on investment websites.

The FSA admits verifying malicious rumour- mongering proves difficult, particularly when a trader operates from offshore. In the United Kingdom (UK) during March 2008, HBOS, a recognized "banking giant" reportedly found itself the centre of vicious rumours, consequently instigating "a spate of 'short-selling' orders from traders." (Jamieson, 2008b) in turn, the rumours stimulated concerns regarding Britain's banking stability and caused some to question whether this country could be headed for a massive banking collapse. As Jamieson (2008b) presents this account in his article, he poses the consideration that some profiteers, trying to make a "killing," systematically abuse the stock market by spreading malicious rumours, which consequently force down a company's stock prices.

As a result of the March 2008, HBOS rumours, for example, HBOS shares, even though backed by "23 million customer accounts and 2.1 million small shareholders," (Ibid.) experienced the start of a severe plunge. Along with the falling shares, the stock market simultaneously grew jitterier about the company, which simultaneously increased fear of an impending financial fiasco for the bank. Before senior executives could squelch the rumours, HBOS shares "tumbled 17%, or more than 80p, to a multi-year low of 398p - their sharpest fall recorded in recent years." (Jamieson, 2008b) to counter the March 2008, HBOS rumours contributing to its stock price decrease, the bank invested a day-long phone-call assault on news agencies, brokers and fund managers. As officials fervently denied liquidity problem reports, they assurance the public and media the HBOS group was not experiencing any financial dilemmas. "HBOS spokesman Shane O'Riordan summed up the rumours in one word: 'Lies'." (Jamieson, 2008b) the American Heritage® Dictionary of the English Language (2000) defines the word "rumor" as:

NOUN: 1. A piece of unverified information of uncertain origin usually spread by word of mouth. 2. Unverified information received from another; hearsay.

TRANSITIVE VERB: Inflected forms: ru mored, ru mor ing, ru mors

To spread or tell by rumor. (Rumor, 2000)

In addition to being spread by word of mouth, however, as Korn (2001, p. 96) cites Susan Wyderko, director of the Securities and Exchange Commission's (SEC) office of investor education and assistance, to note, today, the Internet facilitates the simple swift spread of a rumor claiming a stock is about to take off. "Messages are posted at various sites around the Web, supposedly by many different people. However, you don't know who is doing these postings, Wyderko stresses. (Korn, 2001, p. 96) While the lure to strike it rich with an Internet IPO attracts investors and makes it easier for scam artists to masquerade as legitimate entrepreneurs, an array of fraudulent investment schemes regularly flood cyberspace. Fraudulent promoters now can reach potential marks via e-mail cheaper than back in time when they contacted them through telephone boiler rooms. Richard H. Walker, the SEC's director of enforcement points out that an individual using the Internet and a home computer can now accomplish in minutes what previously took a network of professional promoters and brokers, using banks of telephones months to accomplish. (Korn, 2001, p. 96) Legitimate online newsletters may provide valuable information to investors, however, some online "investment newsletters" and spare (unsolicited e-mail) and messages on Web bulletin boards, despite Federal securities laws, post and promote financial rumours. (Korn, 2001, p. 96)

Some online newsletters make extravagant claims about all the research they do in order to bring you unbiased information; in the meantime, they're spreading false information or promoting worthless stocks. In fact, some of these non-newsletters actually "scalp" the stocks they hype, driving up the price of the stock with spurious recommendations and then selling their own positions for hefty profits. "It doesn't take a lot of money to put up a gorgeous Website," says Wyderko. "Scam artists know if they use certain words such as 'trust' and 'confidence' and 'guarantee,' victims are more likely to believe them." (Korn, 2001, p. 96)

1.2: Study Area

Rumours, a.k.a. financial "lies," have particularly impacted investment banks heavily exposed to subprime mortgage debt in the U.S. (Jamieson, 2008b) Globally, two contemporary rumours, addressed by this study, have impacted the stock market, not only in the UK and the U.S., but in numerous other countries across the world. These rumors related to:

Microsoft and Yahoo Bid

Alliance & Leicester Bank (UK Bank to be acquired by "Credit Agricole Bank (French Bank)

Significance of This Study Although this study specifically focuses on two particular rumours, as rumours constitute a current continuing, critical concern relating to the stock market, which consequently affect individuals and the society in which they live, this researcher contends this study to be a valuable contribution in providing additional insight to this contemporary issue.

1.3: Study Structure This researcher adheres to a basic traditional research framework for this study, as this particular chosen study structure format, this researcher contends, provides the best platform to present this study's "message," while it simultaneously fulfills academic criteria requirements mandated for this study effort. This study's structure includes the following components:

CHAPTER I: INTRODUCTION

1.1: Study Background: In this section, this researcher discusses thoughts regarding rumors to and allows the reader to better understand this researcher's rationale for this particular choice of study.

1.2: Study Area: This researcher points out that no particular location is exclusive to rumours affecting the stock price; that rumours thrive in the global, as well as in the macro environment.

1.3: Study Structure: In this section, this researcher presents a brief overview of the following chapters, along with this researcher's justification for this particular chosen study structure format.

1.4: Aim and Objectives: During this section, this researcher relates reasons for choosing this particular project relating to the affect rumours exert on the stock market prices; along with the driving motivation for the decision. This study's research aim/question is also presented here, and includes a bullet-point list of this researcher's objectives.

CHAPTER II: LITERATURE REVIEW

2.1: Introduction: in this section, this researcher introduces the literature review, and relates why it is important. Themes of literature examined during this chapter are related in this section.

2.2: Rumours, Per Se, the first theme this researcher examines in the literature review chapter, starts with the oldest literature first and finishes with more recent.

2.3: Studies Regarding Rumours, the second theme in the literature review chapter presents information from studies, depicting how financial rumours affect stock prices.

2.4: Two Highlighted Rumours, the third theme presented in the chapter, portrays information relating to the two rumours this study highlights: the Microsoft and Yahoo Bid and the Alliance & Leicester Bank (UK Bank to be acquired by Credit Agricole Bank, French Bank).

CHAPTER III: METHODOLOGY

3.1: Introduction: This researcher relates this study's framework considerations in this segment. This study utilizes a combination of the literature review methodology, along with field research, this researcher reviewed more than 50 sources to ultimately select 20 primary relevant publications to explore and dispel the uncertainty of this study's hypothesis relating to financial rumors' affects on stock prices. Literature reviewed during this study relates to research questions noted in this study's introduction, with the aim to determine the validity of the determined hypothesis. Consequently, along with the researched information, findings from this researcher's also help to determine the validity… READ MORE

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