Target Price Rumor and Its Effect on Market Efficiency

Abstract

The past decade has seen remarkable worldwide development in telecommunications and information technology. This process has occurred in the financial markets as well during the same period, manifesting as a significantly increased number of rumors reaching the Internet, which undoubtedly affected investors.

This study focuses on a distinct, specific event—namely, target price rumors (TPR)—and examining investors’ responses to such rumors. This study consists of two main tests. The first test involves a general observation of investors’ behavior in relation to TPR. The second test observes whether or not market behavior may be predicted for the post-publicity period, based on companies’ performance prior to that period. The first test’s results suggest that the rumor was mostly effective for a five-day period, beginning three days prior to publicity and ending the day thereafter. The second test’s results indicate an inverse trend between companies’ performance prior to publication and thereafter.