Do Denials Help?

After Friday's market close, Level 3 issued a press release disputing a media report that it might file for bankruptcy protection. Level 3 has a policy of "open letters" to shareholders to address potentially damaging rumors.

Setting the record straight is one thing. But does it really help a company to issue press releases denying financial trouble? Or does it just feed the rumor mill even more?

I understand why Level 3 might want to correct rumors about a potential bankruptcy. But consider this: I follow the network infrastructure industry very closely, reading dozens of stories from media outlets and wire services every day. I never saw the story on Bloomberg.com that suggested Level 3 might be a candidate for Chapter 11. But you couldn't miss Level 3's press release, which was picked up by Reuters and appeared on Yahoo and other widely read sites.

Are these denials taken seriously by investors? Consider this precedent: On April 24, 360networks issued a press release denying market rumors that it was out of compliance with its loan covenants. 360networks said it "has always met its debt obligations" and would in the future. Barely two months later, the company was in Chapter 11.

In this market, staying silent in the face of market rumors is difficult. But it's the right response. Press releases like Friday's leave investors wondering if the company doth protest too much.

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