Rumors….You’ve Got to Love Them….or Hate Them

08 May 2007

The stock market loves rumors.  It feeds off of rumors.  Moreover, it almost always overreacts to rumors (on the upside and downside).  Millions, and in some cases billions, of dollars in market capitalization is added and taken away from companies based on rumors.

Examples include, but are not limited to:

  • I heard your company is going to miss the quarter.
  • I hear that so-and-so is going to make a bid for your company.
  • I hear that you guys signed a huge contract.
  • I hear that you lost a big customer.
  • I heard that your CFO is not happy and is looking to leave.
  • Customers are telling me that your products are failing.

IR plays an important role in handling a rumor.  The first step is notifying management and legal council that the rumor exists.  This step is usually preceded by a CEO, CFO, and VP of Legal running down the hall screaming “WHY IS OUR STOCK PRICE DOWN 10 % TODAY!!!”  Next it is working on a coordinated and responsible response to the rumor.  This is where things get interesting.  Many companies stop at “no comment” as their standard coordinated response.  While this may give lawyers the warm and fuzzies it leaves the investment community hanging, to the point where they start making up their own minds with respect to the seriousness and validity of the rumor.

A rumor should be viewed as an opportunity for an IR department. Opportunity?  How is a screaming CEO, an out of control stock price, and 20 voice mail messages from the Street an opportunity?  Well, quite simply, a rumor that is handled well can go a long way in establishing the credibility of an IR department. 

IR needs to do its homework around a rumor.  This involves finding out who the source of the rumor is.  What was the source’s motivation for starting the rumor?  Are there any competitive or market forces behind the rumor?  Have similar rumors surfaced before? While it is very difficult for a company to formally comment on a rumor, you would be surprised at how quickly you can squash a rumor once the facts are uncovered.

All of this works well for unsubstantiated rumors. Now, if a rumor is true….well….that’s a whole other ball of wax that we’ll save for another day.

2 Responses to “Rumors….You’ve Got to Love Them….or Hate Them”

  1. Boyd Neil

    Useful post Anil . . . Do the IR departments in most companies have sufficient IR resources to hunt and kill rumours?

  2. Anil Dilawri

    Thanks Boyd,

    Sufficient resources…usually.

    Right strategy…rarely.

    I think it’s tricky for many IR departments to handle given the legal department’s wishes to just stick with "no comment".  "No comment" is a very valid and responsible response, however, there is nothing wrong with stating the facts as well.  Example – "The company obviously does not comment on such rumors.  Also, it is important for you to note that the same newspaper published similar rumors about XYZ company last month and nothing came of it."

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