HEC Research Papers Series,
HEC Paris

Abstract: Stock prices occasionally move in response to unverified rumors. I propose a cheap talk model in which a rumormonger's incentives to tell the truth depend on the interaction between her investment horizon and the information acquisition decisions of message-receiving investors. The model's key prediction is that short investment horizons can facilitate credible information sharing between investors, thereby accelerating the information capitalization into market prices. Analyzing a dataset of takeover rumors covered by US newspapers, I find suggestive evidence in support of this prediction.

Keywords: Rumors; Cheap Talk; Investment Horizons; Information Efficiency

JEL-codes: G11; G14

64 pages, February 16, 2019

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