When research firm Gotham City released a scathing report on Quindell PLC (LON:QPP) (OTCMKTS:QUPPF), leading to an immediate and dramatic 50% drop in the share price, did this represent a classic moment behavioral economists would call a self fulfilling prophecy? Is the Quindell report from Gotham an example of a “run on the bank rumor?” Such are the thoughts of Richard Stephens, a trader on the Premier Execution Desk at IG Group Holdings plc (LON:IGG) (OTCMKTS:IGGHY) in London.
What is false becomes true
Stephens notes that even if a statement is initially false, the statement can “become true” if the statement changes behavior in a way to validate the false premise. Writing in the blog Econ Matters, Stephens provides the example of a bank run on a strong bank before deposit insurance. Once a rumor starts, even the best capitalized banks would shut down under a run on the bank. Thus, while the rumor may be false, the actions that resulted validate the claim.
Stephens calls Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) “a classic recent example” of unproven allegations bringing down a stock.
As reported in ValueWalk, a report from Gotham, announced on Twitter, claimed 42% to 80% of Quindell PLC (LON:QPP) (OTCMKTS:QUPPF)’s reported profits were “suspect,” among a variety of other claims — impacting the market regardless of proof behind the claim.
Twitter to propel market moving rumors
Taking a step back, Stephens observes with the larger advent of Twitter Inc (NYSE:TWTR) to communicate thoughts typically reserved for insider conversations, rumors can be started in markets that impact pricing as never before. As previously reported in ValueWalk, the fact that an upstart research firm of only two years can have such a dramatic impact on the stock price without fully documented substantiation, as critics say, is an interesting commentary on where our society is today.
Who purchased Quindell research before it was published?
Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) ultimately launched legal proceedings against Gotham. The strongest and most interesting aspect to emerge from this case might not be related to substantiation of charges outlined in the Gotham document, but rather if Gotham worked on concert with other activist hedge funds short the stock to issue the report.
“Whatever the outcome of the Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) proceedings, it is clear the presence of social media in our everyday lives magnifies the effects of behavioural economics and subsequently stock price movements more than ever before,” Stephens writes. “Should Gotham City’s research publication prove to be unfounded, then investors may well look back upon the Quindell episode as the most violent example of effects of behavioural economics in recent times.”
The outcome remains to be seen. While there are no guarantees of results in investing, either way this is an interesting story to watch from the standpoint of activist investing strategy in the intimidation sub category.