Academic journal article Journal of Applied Finance

Fly the Friendly Skynet: Reaction to a False-News Event for United Airlines

Academic journal article Journal of Applied Finance

Fly the Friendly Skynet: Reaction to a False-News Event for United Airlines

Article excerpt

On September 8, 2008, a false-news event precipitates a sharp decline in United Airline's stock price, rapidly leading to an exchange-mandated trading halt. This event allows for the empirical investigation of the effects of a false-news trading halt in an attempt to determine its effect on market quality for United Airlines as well as its industry contemporaries. Findings suggest that United Airlines' reaction to the false-news halt is similar to documented changes in market quality surrounding informational halts; we find a significant price response and an increase in trading volume and post-halt volatility. The market reaction of other publicly traded major airlines suggests that a contagion effect exists for firms that are informationally related to organizations experiencing a firm-specific trading halt, even when the halt is prompted by a false-news shock. A muted reaction on the part of regional airlines implies that the market is able to establish the level of information relatedness based on firm characteristics and that this awareness impacts the market's subsequent reaction.

*On Monday, September 8, 2008, the price of United Airlines' stock plunges 76% (from $12.50 to $3.00) within a 15 -minute span, leading to an exchange-mandated trading halt for the security. This precipitous decline and subsequent interruption in trading are not a reaction to information concerning the company's financial performance or position. Instead, this false-news event can be attributed to the workings of an Internet bot: Google's News crawler.1

The purpose of our study is to examine the impact of a false-news event and the resulting trading halt on United Airlines' stock to determine if the market's reaction is similar to market behavior surrounding informational halts. Further, we look at the industry's response to this event, with respect to stock price, return volatility, and trading volume, to discover if a contagion effect exists around a false-news shock for competitor airlines.

The impetus for this event dates back to December 10, 2002, when an article appeared in the Chicago Tribune describing United Airlines' then bankruptcy proceedings. This news item was stored and remained available in the online searchable database of the Sun Sentinel. In the early morning hours of Sunday, September 7, 2008, a link to this story appeared under the "Popular Stories Business: Most Viewed" section of the Sun Sentinel's online business section after a late-night visitor viewed the story. Google's web crawler discovered the new link and, because there was no date associated with the article, interpreted it as a recent announcement.

This "news" release was then detected by an investment and advisory research firm and forwarded to Bloomberg Financial news service, who at approximately 11:03 a.m. on Monday, September 8, published the headline. Subsequently, algorithmic trading programs, which instigate transactions based on news headlines and earnings announcements, initiated selling of United Airlines' stock until the National Association of Securities Dealers Automated Quotations (NASDAQ) stock exchange halted trading on the security. Figure 1 shows the September 8, 2008 intraday prices for United Airlines stock.

I. Related Literature

A.Trading Halts

Exchange mandated trading halts occur frequently in today's financial markets. 1,152 trading halts occurred in the 12-month period from 7/6/2010 to 7/5/2011 (an increase from the 815 halts that occurred in the 2009 calendar year), and nearly 88% of these halts are associated with the request, receipt, or dissemination of news.2 A trading halt, by its regulatory nature, interferes with the free market process and has the potential to meaningfully affect market quality and subsequently produce economically significant effects. Previous research presents conflicting views on the associated costs and benefits of trading halts.

Advocates believe that trading halts have the potential to aid in the dissemination of information and the enhancement of price discovery. …

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