The role and impact of rumours on Wall Street

Subject: The role and impact of rumours on Wall Street

Assignment for the « Management & Motivation » course, realized by: Cendrine LELOUP, Ingrid MARQUEZ, Anne-Charlotte PHILIPPE, Rémi SLAMA and Aicha TAOUIL TRAVERSON

Grade: B+

An overview of rumours

A rumour is a circulating and significant story that can be true or not. It could be initially made up to satisfy personal motivation like revenge. It is not always based on something negative. In fact, 72% of rumours are based on something positive, 21% with a positive predominance and only 7% are negative.

A rumour can be whether internal to a group (the rumour initiate inside the group and is spreading between persons who are part of this group) or external (other companies, unsatisfied customers, press etc.)

According to Robert Knapp, the writer of “Psychology of Rumour” and Allport, they are 3 principal categories of rumours:

  • Pipe dreams: the most positive rumours. They express a wishful thinking and they are common in business (example: the amount of the year-­‐end bonus). They’re less spread than the wedge drivers
  • Wedge-­‐drivers: they intend to cause division inside groups and/or break friendly relations
  • Bogies or fear rumours: they are malicious rumour. Their aim is to scare the marketplace. In the financial market, they can be deadlyOther categories of rumours exists such as:
  • Self-­‐fulfilling rumours: they can modifify perceptions and create a new appearance of reality
  • Premeditated rumours: they are spread by organizations in order to win some advantage or by persons for satisfying personal motive

In the press article “It’s not unprofessional to gossip at work” written by Labianca, the fact of telling rumours is something human. Indeed, people have to share their information, their feelings, and their fears. At the office, managers also use rumours to know more about their employees, a sector and so on.

One of the characteristics of a rumour is that it is spread. Rumours are spread by people via different ways (word of mouth, newspaper etc.). “Rumours can be found circulating almost anywhere and any time, not only in crises but in normal everyday situations”.

And today, rumours are spreading even more quickly with the use of new technologies.

The person who spread rumor is call “rumourmonger”.

The study of James Esposito in 1970 at Temple University showed that a rumourmonger is more likely to be a person without many friends and with a low self-­‐esteem. They spread rumour in hopes of building relationships and to reduce discomfort and anxiety due to bad self-­‐worth.

A study made by Gordon W. Allport and Postman during World War II, establish two components for a rumour to be spread:

● Anxiety: “the more anxious people are, the more likely they are to be rumourmongers”

● Uncertainly: an uncertain and stressful situation will enhance anxious feelings
As a result, this 2 ingredients will made urgent the speeding of the rumours in order to diminish anxious and uncertain feelings.



Rumours in Financial marketplace

In financial marketplace, rumours are part of the business. The strict etymology of the word “speculation” means, “anticipate”. Even if it sounds as a negative word, we should understand through this word that traders try to predict the future. As they have no information available, they spread “news” before others.

Furthermore, trading world is a very propitious context for the spreading of rumours: it combines high instability situation, overwhelmed flow of economic information by a multitude of channels (TV, radio, Internet, news papers) and no real deontological information flow.

There are different ways to spread rumours:

  • through very trustful sources as “ The Wall Street Journal”
  • via an important network (using word-­‐of-­‐mouth)

    Source: “La rumeur en Bourse” Jean-­‐Noel Kapferer.

An other important point to notice is the impact on rating companies. The rumours may influence rating companies. By hearing some negative rumours about a company, the rating firm may modify the mark. Consequently, mortgages can be under evaluated; it can pass from an AAA to worse.

The two major rumours in the movie are of different kind:

  • “Keller Zabels rumours”: rumours about the fact that Churchill’s rumours cause the suicide of the CEO of Zabels. The Churchill’s leaders have succeeded in making people believe that Keller Zabels have made suspicious investments and that they are not a reliable mortgage. In consequences, the price of their action decreased and they lost their partner (banks and rating companies support). The main purpose of this rumour is to make the company close by offering to buy the shares at 3 dollars. This is for revenge from a previous deal that Bretton lost again Luis Zabel. In this case, we can say that it is an illegal competition.
  • “Churchill Schwartz rumours”: the nationalization of an African oil that Bretton owns. The aim of this rumour is to decrease the price of the actions (bogies rumour). Jake want Churchill loose money and its credibility so he used the word of mouth; he want to do the same that they do before to keller zabels company. Jake draws the attention of Bretton and he enters in its company for avenge Keller Zabels company.

At the end of the movie, Jake collects all information (based on real facts) about illegal aspects of Bretton’s businesses. He gives this entire package to his girlfriend, who diffused it in her trustful website. This information spreads in the financial marketplace, making Bretton guilty of crimes and banned of the financial business world. This is not a rumour but real information spread on the financial marketplace. It is interesting to see the difference between rumours spreading and information spreading.

These rumours are similar to that of today because everyone is trying to discredit his competitors and it is important to look at who benefits from the rumour to find the source of the rumour.

 

Rumours inside firms

Rumours can be used within a firm if a competent and specialized management team controls it. Generally, rumours in organizations, translate a lack or dysfunction of internal communication from managers/direction to employees. Especially in case of crisis, doubts and uncertainty are fed by the absence of information. Consequently, managers, instead of denied this rumours, have to face and assume them. They have to use them to identify what employees really need. The manager team must analyse the rumour and determine what kind of information is behind it. By studying this rumour, they will identify the population and adapt their communication plan to the specific target.

Rumours are internal and translate:

  • Either doubt: the best reaction is to answer to these doubts
  • Or real malfunction and so the best reaction is to try to rebuild it

In those cases, rumours can become really resourceful for companies as it permits to rebuild internal structure in a better way. This also permits to improve internal relation between manager and employees before it came to a critical point (point of no return). This crucial information make the rumour a real opportunity for firms. On the other way, rumour can be a real threat for companies. By spreading false messages, the impacts on the company are very important. Especially, when rumours attack the brand image of the organization. It generates a decrease in demand (boycott) and so in sells. That is why, in some organization, managers decided to watch on their own brands. These negative rumours are globally coming from external sources, either a competitor or a specific public. The best action to do is trying to find the roots of this rumour and planning a contest action as soon as possible.

Rumours can affect a product or a brand (its image). Taken seriously, rumours deteriorate the sales, turnover, earnings and the customers/investors link. We can illustrate this example with the Procter & Gamble case. A rumour was believed that the logo of the company had a satanic meaning. It had a real impact for the brand image of P&G and make the sales decrease. Since the company changed its logo, sales increased anew.

Action plan to reduce rumours

Rumours can have positive ending or negative ending. The problem comes when it’s the second one. A negative rumour breaks the image of the company and with that have a negative action on customers and shareholders.
To act against negative rumours, the public relation’s departments have to organize an action plan. It is responsible for repairing the damage. This action plan has to be adapted to each kind of rumour.

According to the article of James L. Esposito and Ralph L. Rosnow, “Psst … corporate rumours: How they start and how to stop them”, the best way to defend company from dangerous rumours or to prevent them is to create a specific management.

There are two types of rumours. For each type, there is an action plan:

Concerning internal rumours:

  • Information is very important to people, indeed, this information affects their lives (job security, relocations, opportunities) by many different ways (bulletin boards, newsletters, memos).
  • As rumours come from a lack of information, the company needs to keep employees informed.
  • to heed rumour: the company has to investigate to know where rumours come from and to determine the causes of anxieties (why employees are preoccupied).
  • To act promptly: rumours can take huge proportion in few time (especially with new real time social networks like Twitter, Facebook); so, it’s necessary to react as fast as possible with sincerity.
  • To enlighten personnel: explain to employees the impact of bad rumours to the company or someone. This step helps to anticipate the anxiety or the uncertain situations with preventive measures.

Concerning external rumours:

  • Collect all the information: it’s very important to verify the rumour, to collect all the facts, understand the consequences (is there a gain for someone?) and to estimate the sources of uncertainty and anxiety by talking individually to the persons who are concerned
  • Prepare a public response: by repairing a formal response which will included all the facts related to rumours and work on an Information Dissemination Plan (IDP). An IDP is a plan to propagate the facts with mass media.
  • An action phase: by evaluating the level of rumour propagation and applying the plan to reduce the impact. Indeed, if the rumour is propagated to a limited audience, only the company’s representatives are needed to contain the rumour. However, if the rumour is widespread, you will have to apply the IDP. Then, if the source of the rumour can be identified, envisage legal pursuit. If the source can’t be identified, show that the company want to stop the rumour.

 

Sources:

Movie “Wall Street : Money never sleep” Oliver Stone

Esposito & Rosnow (1983). Pssst… Corporate rumours: How they start and how to stop them. Management Review, April

Kimmel (2004). Rumours and the Financial Marketplace. The Journal of Behavioral Finance, 5 (3)

Labianca (2010). It’s not “unprofessional” to gossip at work. Harvard Business Review, September

“Liquidity rumours unleash bears on Bear Stearns”, The Guardian, March 11th 2008

“Bank chief blames rumours and market fixers for Bear’s collapse”, The Guardian, April 4th 2008

“Three weeks that changed the world”, The Observer, December 28th 2008 TM“Rumours in Financial Markets : Insights into Behavioral Finance” Mark Schindler

Interview “La rumeur est devenue la première source d’information des entreprises” Patrick Canseil CEO Artem-­‐Is

Video “The Science of Gossip and Rumours” DNews