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Financial regulatory and risk management challenges stemming from firm-specific digital misinformation
Casey K., Casey K.  Journal of Data and Information Quality 11 (1): 1-4, 2019. Type: Article
Date Reviewed: Sep 30 2021

In today’s digital economy, it is easy to alter the essence of information with regards to both context and value; thus, the potential for misinformation is huge. With this paper, Casey and Casey excellently present a new risk management approach for financial institutions operating in an era of information noise. He does so using three key categories: event studies, the “pump-and-dump” model, and digital misinformation, all of which rely on a critical view of stemming analysis that copes with the ever-growing spam dissemination via social networks. An event study, as a method to assess the impact of an event on an outcome of interest, is connected to the risk management of critical events in financial affairs. Critical events in financial institutions are unpredictable by nature, and the growing risks demand a proactive strategy to moderate disruptions. Thus, risk management as the identification, assessment, and prioritization of risks is crucial for critical events that occur very fast thanks to the digital online dissemination of misinformation. Resources are required to minimize, monitor, and control the probability and impact of risk events. These issues are verified through the pump-and-dump event that strongly influences the abilities of regulators and risk managers to manage misinformation.

Today, misinformation spreads very easily thanks to information technology, and the influence such misinformation has on financial markets becomes very clear when we take into account the vast amount of data delivered every day. As access to stock market information becomes increasingly available thanks to the many news programs and finance-related websites, so does access to incorrect information. The misinformation effect can occur whenever there are inconsistencies between sources. Casey and Casey present the effect through an example of pump-and-dump scams. Although pump-and-dump methods started through cold calling, with the advent of online trading and marketing, this illegal practice has become even more dominant. Hoaxers post messages online that attract investors to buy a stock quickly, with claims that a development will lead to an increase in the share price. The hoaxers then sell their shares, causing prices to drop dramatically, and the new investors lose their money.

All of these issues present many challenges for regulators and risk management. Casey and Casey successfully recognize the scope of these two types of challenges: regulators must control the relevancy and accuracy of information, whereas risk managers must recognize scams as misinformation that creates critical events; a holistic approach is necessary due to the nature of digital information. Within organizations, financial risk management works to detect, manage, and hedge exposure to various risks stemming from the use of financial services; it also faces new challenges.

Through the analysis of two challenge types, Casey and Casey identify research directions: for regulators, the “immediate detection of misinformation” is not required, although such misinformation works quickly via online platforms; risk managers, however, “need to detect financial misinformation immediately” in order to “limit the damage to existing shareholders and/or the firm’s reputation.” Research proposals cope with creating “a more comprehensive long-term solution ... to digital misinformation’s effect on financial markets and firms.” There is room for new solutions; for example, algorithms that automatically assess information quality or a comprehensive regulatory plan “to limit the effectiveness of digital misinformation.”

Business and finance students should read this paper in order to better understand new forms of misinformation. It will also interest course designers who can enrich their curricula by including the challenges that misinformation exposes within digital economies. Finally, it could definitely serve as a guide for further research in financial regulation and risk management in the area of digital misinformation.

Reviewer:  F. J. Ruzic Review #: CR147366
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