Facts, Fiction, and the Fourth Estate

A bstract .   This paper examines the reaction of the market to news that the Washington Post had won a Pulitzer Prize for a story that was demonstrably false. The reaction to the stock price of the Post as well as the stock prices of other newspapers is examined using dummy variables for two days, four days, and six days. The results show that while the decline in the Post 's stock price was relatively small, the t-statistics for all of the dummy variables are significant. The paper also examines the McChesney (1987 ) hypothesis that the nature of the newspaper business is such that it is difficult for the residual claimants of the paper to receive the financial gains of important news stories. These rents, he points out, are distributed to others. We look to see whether or not residual claimants of that newspaper can be harmed if that newspaper publishes a false story and receives large amounts of bad publicity for its error.