Rumors in the sky: Corporate rumors and stock price synchronicity

Using hand-collected rumor clarification announcements from Chinese listed firms to identify corporate rumors, we find that rumored firms have lower stock price synchronicity (R2) than do firms without rumors. Channel analyses reveal that rumors reduce stock price synchronicity through elevating investor sentiment rather than stimulating informed trading. Additionally, the negative association between corporate rumors and stock price synchronicity is more evident among firms with more individual investors and higher information opacity. Moreover, corporate rumors are associated with higher analyst forecast errors and forecast dispersion. Overall, our evidence suggests that corporate rumors reduce stock price synchronicity by increasing investor irrationality.