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The persistent effects of a false news shock


  • Carvalho, Carlos
  • Klagge, Nicholas
  • Moench, Emanuel


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.

Suggested Citation

  • Carvalho, Carlos & Klagge, Nicholas & Moench, Emanuel, 2011. "The persistent effects of a false news shock," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 597-615, September.
  • Handle: RePEc:eee:empfin:v:18:y:2011:i:4:p:597-615

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    References listed on IDEAS

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    Cited by:

    1. Joel Peress, 2014. "The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes," Journal of Finance, American Finance Association, vol. 69(5), pages 2007-2043, October.
    2. Fabrizio Germano & Francesco Sobbrio, 2016. "Opinion dynamics via search engines (and other algorithmic gatekeepers)," Economics Working Papers 1552, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2017.
    3. Peter Koudijs, 2013. "The boats that did not sail: Asset Price Volatility and Market Efficiency in a Natural Experiment," NBER Working Papers 18831, National Bureau of Economic Research, Inc.
    4. Saif Ullah & Nadia Massoud & Barry Scholnick, 2014. "The Impact of Fraudulent False Information on Equity Values," Journal of Business Ethics, Springer, vol. 120(2), pages 219-235, March.


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