Uneasy lies the head that wears a crown : firm network status and market response to negative rumors

This study investigates whether firm status in networks is a burden in the context of negative rumors. We use a network approach to capture firms' network of affiliations through cross-shareholding and to identify status hierarchies embedded in the relational structure. Using a sample of 1428 negative rumors related to 913 firms during the period 2007-2015, we find that the market responds negatively to negative rumors and that high-status firms suffer more than low-status firms do. Our mechanism tests show that high-status firms attract more attention from the media than low-status firms and that differential media attention plays a mediating role in the relationship between firm status and market response to rumors. In addition, we find that investor sentiment strengthens the status-market response relation. Further analyses show that although high-status firms vigorously deny rumors by rumor clarification announcements, their denial strategy does not function as intended. These results provide robust evidence that status is a burden when encountering negative rumors and that media play an essential role in facilitating the relationship between firm status and market reaction to negative rumors.