The Persistent Effects of a False News Shock

Posted: 17 Nov 2011 Last revised: 22 Jul 2019

See all articles by Carlos Carvalho

Carlos Carvalho

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Kapitalo Investimentos

Nicholas Klagge

Federal Reserve Bank of New York

Emanuel Moench

Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2011

Abstract

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines’ parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company’s stock price to drop by as much as 76% in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2% below the previous close. We explore this natural experiment by using a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company’s stock was still trading below the two-standard-deviation band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at the level predicted by the asset-pricing model. We investigate several potential explanations for this finding, but fail to find empirical evidence supporting any of them. We also document that the false news shock had a persistent negative effect on the stock prices of other major airline companies. This is consistent with the view that contagion effects would have dominated competitive effects had the bankruptcy actually taken place.

Keywords: Fake News, False News, Natural Experiment, United Airlines, Noise, Market Efficiency

JEL Classification: G10, G14

Suggested Citation

Carvalho, Carlos and Klagge, Nicholas and Moench, Emanuel, The Persistent Effects of a False News Shock (September 1, 2011). Journal of Empirical Finance, Vol. 18, No. 4, 2011, Available at SSRN: https://ssrn.com/abstract=1946042

Carlos Carvalho (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22451
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Kapitalo Investimentos ( email )

São Paulo
Brazil

Nicholas Klagge

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Emanuel Moench

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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