Efficiency Costs Fairness: Resolving Financial Market Rumors through Public Inquiries

Should regulators require firms to publicly confirm or deny rumors? In a sequential trading model, such "rumor regulation" may enhance pricing efficiency through two mechanisms: (i) an increase in the number of informed traders brought about by the public inquiry (ii) a shortened information advantage period. However, data on rumor-disclosure events in the Korea Exchange shows that such regulations may actually reduce fairness: informed traders earn higher profits than in the absence of the regulation due to an increase in noise trading and false alerts.