How Message Board Rumors Can Hurt Your Business

The number of individual investors participating in the stock market continues to increase, and many of them frequently use the Internet to obtain information as there is such a variety available. (1) A company may provide audited and unaudited information on its website. Some of the material is financial; the other can be management's discussion of the future. More information comes from third parties such as analysts, the news media, and other investors. When it comes to Wall Street, information is essential. (2) With the Internet, millions of people can interact daily and pass along data, factual and rumor-based, including financial accounting information. (3) Online sources for exchanging information include Internet stock market message boards such as those at Yahoo! Finance (http://finance.yahoo.com). Yahoo! Finance had approximately 12 million registered users in February 2006. (4) Despite this large number, limited research has actually been done on the message boards. Prior research primarily concerns the message board relationship with stock price volatility and stock returns. My research has also been limited by interpreting existing message postings. In this study I address the question: "Do message postings have an influence on nonprofessional investors' investment decisions? " Knowing whether there is an influence is the first step in understanding how these postings may affect a business. Studies have found that some investors do not understand or even review financial statements. (5) Marc J. Epstein and Moses Pava found that nearly 30% of investors in the United States lack the knowledge necessary to understand basic financial statements, and David F. Hawkins and Barbara A. Hawkins found that more than 50% of investors simply skim over annual reports without performing any formal analysis. (6) Typically, more-experienced investors have a better ability to understand and use unfiltered financial information (e.g., Securities & Exchange Commission (SEC) filings), whereas less-experienced investors are more likely to seek help in interpreting the information. (7) To help with either understanding financial reports/earnings information or to gather information that does not come from the company, investors may seek information from third parties such as analysts, the financial news media, and/or message boards. There can be various degrees of accuracy, however, within third-party information. Some of the information is factual and verifiable; other information is rumor-based only. The rumor-based information can make an impact on the market. For example, a financial rumor can spread quickly on the Internet and gain believability, and other sources, such as television and the print news media, have the opportunity to present the item as news. (8) Message boards tend to be a good source for beginning rumors. (9) One instance of using the Yahoo! Finance message board to start a rumor took place in April 1999. An employee of PairGain Technologies, Inc. posted on the message board that PairGain had agreed to be acquired and even included a link to a fake news announcement. PairGain's stock increased more than 30%. (10) Through an experiment, I tested the influence of a set of message board postings on MBA students' (proxy for nonprofessional investor) investment decisions. I compared the participants' investment decisions before and after the students were exposed to message board postings. Then I compared changes in investments for the participants receiving the message board postings to a control group that made an investment decision based on only the financial data before and after completing a simple distraction task. I hypothesized that the groups receiving message board postings would change their investment decisions. A fourth group received a mixed set of message board postings (equal negative/positive) as a second control group for additional analysis. The results indicated that the biggest influence came from negative message board postings. …