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Uneasy lies the head that wears a crown: Firm network status and market response to negative rumors

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  • Fan, Michelle Xiaomin
  • Wu, Huiying
  • Ying, Sammy Xiaoyan
  • You, Jiaxing

Abstract

This study investigates whether firm status in networks is a burden in the context of negative rumors. We use a network approach to capture firms' network of affiliations through cross-shareholding and to identify status hierarchies embedded in the relational structure. Using a sample of 1428 negative rumors related to 913 firms during the period 2007–2015, we find that the market responds negatively to negative rumors and that high-status firms suffer more than low-status firms do. Our mechanism tests show that high-status firms attract more attention from the media than low-status firms and that differential media attention plays a mediating role in the relationship between firm status and market response to rumors. In addition, we find that investor sentiment strengthens the status-market response relation. Further analyses show that although high-status firms vigorously deny rumors by rumor clarification announcements, their denial strategy does not function as intended. These results provide robust evidence that status is a burden when encountering negative rumors and that media play an essential role in facilitating the relationship between firm status and market reaction to negative rumors.

Suggested Citation

  • Fan, Michelle Xiaomin & Wu, Huiying & Ying, Sammy Xiaoyan & You, Jiaxing, 2023. "Uneasy lies the head that wears a crown: Firm network status and market response to negative rumors," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:pacfin:v:82:y:2023:i:c:s0927538x23002330
    DOI: 10.1016/j.pacfin.2023.102162
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    More about this item

    Keywords

    Firm status; Rumor; Media;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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