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The Impact of Fraudulent False Information on Equity Values


There are two types of stock price manipulation examined in the theoretical literature: (1) insider trading, which involves private information that is true and (2) the public spreading of fraudulent false information. While there is a large empirical literature on insider trading, this is the first empirical article to examine the impact of false, fraudulent public information on stock prices and trading volume. We find that such false information, even after being denied by a credible source such as the SEC, generates both abnormal returns and abnormal trading volume. We also find that the effects of the false information on security returns and volume can be persistent for at least 2 weeks. In addition, we show that perpetrators of false news attacks can make potentially large profits from such market manipulations.

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  1. 1.

    Recent examples include studies by Lakonishok and Lee (2001), who find that insiders are better able to predict cross-sectional returns and Fishe and Robe (2004) who use trades of informed outsiders (illegal traders) to examine the impact of insider trading on market depth and liquidity. Bushman et al. (2005) find that analyst coverage increases after insider trading restrictions are enforced. Insider trading leads to the problem of asymmetric information and can restrict the participation of investors in the market.

  2. 2.

    Jones and Lamont (2002) look at the spread of rumors about different stocks by investors who have taken short positions in these securities.

  3. 3.

    Rumours have been used to manipulate prices, e.g. Jones and Lamont (2002). On the other hand, Pound and Zeckhauser (1990) study the effects of rumours about different firms that appear in ‘Heard on the Street’ (HOTS), a column in the venerable Wall Street Journal, on their stock prices.

  4. 4.

    Securities and Exchange Commission considers denial of a true piece of news by a company as illegal.

  5. 5.

    The important distinction between our use of false fraudulent information and rumour is that false fraudulent information is verifiably denied by the firm or a regulatory body.

  6. 6.

    We provide other news items in the Appendix.

  7. 7.

    Holthausen and Verrecchia (1990) propose that information has two effects on investors: (a) it affects the degree of knowledge that investors have about the true value of the security and (b) it affects the degree of agreement amongst the investors about the true value of the security. In our case, we might observe three cases. First, we might observe abnormal change in price and volume because the new information is considered relevant by some investors and they trade on it. This might indicate lack of consensus amongst investors. Second, we might observe an abnormal change in price and a decrease or no change in volume because the new information leads to a consensus amongst the investors. Third, we might observe no change in price and trading volume because the investors do not believe the news or denial.

  8. 8.

    Our results are consistent with different theories postulated in finance and psychological literature. We discuss some of these competing and sometimes complementary theories in “Discussion and conclusion” section.

  9. 9.

    Conceptually, we expect a similar effect as the one that takes places before announcement of the acquisition of a firm. In these cases, there is a well-documented run-up to the announcement of bid for acquisition of a firm. Because of the slow incorporation of private information of insiders in the price of the target firm, there is still a big jump in the price of the target on the day of actual announcement (for example, see Fig. 2 of Schwert 1996).

  10. 10.

    We are thankful for an anonymous referee for suggesting that we restrict our focus to positive false news events.

  11. 11.

    We use daily returns and turnover in measuring the effect of fraudulent false information on stock prices and volume. We use raw as well as detrended turnover in our analysis.

  12. 12.

    We only report results for positive fraudulent false information in this article. Results for negative fraudulent false information can be obtained from the authors on request.

  13. 13.

    False information events included in our sample are denied by the firm or by the firm and a legal authority.

  14. 14.

    Indeed the issue of the credibility of news is important in any reputational context. According to Berlo et al. (1961) credibility has three main components: competence, trustworthiness and dynamism. In its simplest form, credibility can also be defined as ‘believability’ (Fogg 1999). Self (1996) describes ‘credible sources’ as ‘trustworthy’ and ‘having expertise’.

  15. 15.

    We believe that event study methodology is appropriate for this study. MacKinlay (1997) provides the rationale and appropriateness of event studies for different information driven events. “In accounting and finance research, event studies have been applied to a variety of firm specific and economy wide events. Some examples include mergers and acquisitions, earnings announcements, issues of new debt or equity and announcements of macroeconomic variables” (MacKinlay 1997).

  16. 16.

    We use the event study methodology to measure the effect of false news events because, “the event study methodology has, in fact, become the standard method of measuring security price reaction to some announcement or event” (Binder 1998). We use the Fama–French three factor model because, “though the use of multifactor models produce only marginal benefits in predicting event day returns, their use is recommended because they generate less skewed abnormal returns that are better suited for statistical tests. The most robust procedure to sample selection pricing bias is the Fama–French three factor model with a sign statistic”(Ahern 2009).

  17. 17.

    Fama and French three factors are from Kenneth French’s webpage.

  18. 18.

    Results of other windows are available from the authors on request.

  19. 19.

    We also conduct a standard event study using volume of these firms. The event study was performed using EVENTUS software. These results are robust to evidence provided in this article.

  20. 20.

    We thank one of the anonymous referees for suggesting this.

  21. 21.

    In order to accommodate heteroscedasticity and the possibility of serial correlation in daily returns, we report Newey–West (1987) corrected standard errors using one lag.

  22. 22.

    Our study formally documents the process through which these fraudsters make money.

  23. 23.

    We are thankful to one of the anonymous referees for suggesting this as the main difference between our study and previous studies.

  24. 24.

    We are grateful to an external referee for pointing out these alternative possible explanations.


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The authors would like to thank two anonymous referees for their valuable comments. Any remaining errors are ours. Massoud and Scholnick would like to acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. A previous version of this article was awarded the prize for the best paper presented by a Ph.D. student at the Northern Finance Association (NFA) Conference in Vancouver.

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Corresponding author

Correspondence to Saif Ullah.


Appendix A

See Table 8.

Table 8 Variable index

Appendix B: Examples of News Reports of False News

General Cinema Stock Hoax Probed

Associated Press

30 July 1988

The San Francisco Chronicle

The federal government and the New York Stock Exchange said yesterday they are examining a bogus claim of a large investment in General Cinema Corp. that triggered a sharp rise in the price of the company’s stock.

Securities experts said the filing by an unknown London man from a fictitious London address of a 6.1 % stock acquisition in the soft drink bottler and movie theatre operator raises questions about Securities and Exchange Commission guidelines.

‘It’s very disconcerting’, said Sam Scott Miller, a New York securities lawyer. “The system is designed to provide for very speedy dissemination, which is highly desirable to let the public know when someone takes a position. But the incident certainly shows that can be taken advantage of by someone”.

General Cinema, based in Chestnut Hill, Mass., received a brown manila envelope with no return address and a New Jersey postmark late Thursday morning. Inside was a copy of a letter to the SEC from a Kile Johnasen of 15 Apple Street, London, and a copy of a partial 13-D form, required whenever an investor holds more than 5 % of a stock. The man said he used ‘personal funds’ to acquire 2.8 million shares of General Cinema worth about $61 million.

Sec Charges Broker for Repeatedly Disseminating Fake Press Releases, Making Fraudulent Internet Postings

28 October 2009

US Fed News


Washington, Oct. 22—The Securities and Exchange Commission issued the following litigation release:

The Securities and Exchange Commission today charged Lambros Ballas, a licensed securities broker at a New York stock brokerage firm, with using phony press releases to manipulate the stock prices of multiple publicly traded companies. Ballas created and then distributed fake press releases purporting to announce good news regarding the companies, including that Google was buying one company at a substantial premium. Ballas then posed as an investor on Internet message boards, touting the announcements he had fabricated. In one instance, Ballas’ scheme caused the stock price to increase by over 75 % within a few hours of the issuance of his phony press release. Amongst other relief, the SEC is seeking an emergency court order to enjoin Ballas from further fraudulent activity.

The Commission’s complaint, filed in federal court in San Jose, California, and documents filed in support of the requested emergency relief, alleges:

On 29 September 2009, Ballas issued a phony press release announcing that Pennsylvania biotech company Discovery Laboratories had obtained approval from the US Food and Drug Administration for a drug under development. Ballas then posted a message on a stock message board with a link to what he described as the company’s ‘official press release’. In his post, Ballas claimed to have called his ‘personal broker’ who ‘says it’s been confirmed’. Discovery Laboratories’ stock price shot up nearly 50 %.

The next day, September 30, Ballas issued a release falsely claiming that IMAX Corporation had been acquired by Disney. Once again he followed up by posting links to the phony release on a stock message board, telling other potential investors that he had bought 10,000 IMAX shares and that his broker ‘just called me to tell me at the crack of dawn’.

Ballas continued his scheme on October 1, issuing a phony press release stating that California search engine company was being acquired by Microsoft. Ballas followed this by again posting messages and links to the release on stock message boards. In one posting he stated: “Local just bought out by Microsoft, at $12.50 per share including patent ownership”. In aftermarket trading,’s stock price rose over 75 %.

Later that night, issued a corrective release saying that the Microsoft release had been false—there was no Microsoft acquisition. Undeterred, the next day Ballas issued another phony release, this time stating that it was Google, and not Microsoft, that was acquiring the company.

The SEC further alleges that for at least one of the stocks he touted, Ballas purchased shares of the company immediately before disseminating the phony press release he had drafted.

In its federal court action against Ballas, the SEC alleges Ballas violated Section 10(b) of the Securities Exchange Act of 1934 (‘Exchange Act’) and Rule 10b-5 thereunder. The SEC seeks an ex parte temporary restraining order, a preliminary and permanent injunction, expedited discovery, disgorgement with prejudgment interest and civil penalties against Ballas.

The Commission appreciates the significant assistance of FINRA, the Financial Industry Regulatory Authority. The Commission’s investigation is continuing.

The Business of Trickery; Documentary Shows How Pair Perpetrates Elaborate Hoaxes on Corporate World

Jay Stone

Canwest News Service

22 January 2010

The Yes Men are a New York City-based consortium—well, it’s two guys—who are against globalization but in favour of madcap hoaxes: Borat meets Michael Moore, essentially. The Yes Men Fix the World is the second documentary (The Yes Men came out in 2004) that follows them as they do their thing, which is to appear in shirt and tie at conferences and perpetrate frauds on the businessmen there, thus exposing capitalism for what it is, i.e. a system that supports a lot of conferences.

Some of this is funny, some of it bombs, but all of it helps illuminate the excesses of an economy in which profit is everything. Thus, in their biggest hoax to date, Andy Bichlbaum goes on BBC television as ‘Jude Finisterra’, spokesman for Dow Chemical, to announce that 20 years after the Bhopal disaster—an explosion at a pesticide factory that killed 5,000 people, made more than 100,000 permanently ill, contaminated the local water system, and caused lasting environmental damage—Dow was going to pay $12 billion to compensate the victims.

‘The shareholders will take a hit’, Finisterra announced, but everyone would be happy to be doing the right thing at last.

Well, they were not really. Dow stock lost $2 billion in value in 23 min: the system, the Yes Men had shown, was set up so that humanitarian behaviour is not rewarded.

Meanwhile, of course, the people of Bhopal had been given false hope, which is the chief criticism made of the Yes Men and their pranks. The movie shows, however, that the victims—in Bhopal and later in New Orleans, when Bichlbaum poses as a US Department of Housing and Urban Development official and announces that public housing that was closed by Hurricane Katrina would finally be reopened—welcome the attention. ‘Totally worth it’, says a Bhopal health care worker.

April Fools Day Spoof Article Claims Telstra to Split Operations; Shares Spike

  • By Rebecca Urban

  • 04 April 2009, 12:01 am

Spoof article posted on the internet Claims Telstra will split operations International trading frenzy follows

IT was the April Fool’s Day prank that sent stock market traders on a $1.9 billion ride but got few laughs in the process.

And now the corporate watchdog—not known for its sense of humour, especially on the subject of rumour-mongering—is believed to be looking into how a spoof article that claimed Telstra would split its operations into two could have whipped up an international trading frenzy.

The April 1 dateline on the article, posted by an online technology publication on Wednesday at about 11 am (AEDT), should have rung alarm bells. But in the US, where there is a solid market for Telstra stock, it was still March 31, The Australian reports.

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Ullah, S., Massoud, N. & Scholnick, B. The Impact of Fraudulent False Information on Equity Values. J Bus Ethics 120, 219–235 (2014).

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  • False news
  • Credible denial
  • Market manipulation
  • Price reversal
  • Abnormal returns and abnormal trading volume
  • Event study
  • Front-running