How rumors fly

News media do not always report objectively. In particular, negative rumors encourage news media to hype unconfirmed reports and lead to media bias. In this study, we seek to understand how negative rumors spur corporate clarifications. We find that after rumors surface, news coverage of those rumors by credible sources increases the magnitude of subsequent media bias on target firms. Moreover, we find that the power of a negative rumor depends on the extent to which the public believes the rumor. We focus on how community religious norms affect the public's interpretation of rumors and propose that religious norms among the population surrounding a target firm increase the magnitude of negative media bias on that firm. To counter media bias, we find that firms—especially those with reputations for corporate philanthropy—make technical clarification announcements that provide substantial details. Based on samples of negative rumors in the Chinese stock market from 2006 to 2012, empirical studies provide strong support for our arguments.