Updated from 1:55 p.m. EDT

Whispers may be insubstantial, but they can topple powerful players.

Just look at what happened to Bear Stearns ( BSC).

A week ago, the investment bank was valued at billions of dollars. Now, JPMorgan Chase ( JPM) is offering just $236 million for the company, Wall Street's equivalent of an everything-must-go yard sale.

While analysts debate exactly what or who is to blame, there's a larger lesson here for any small businesses, no matter how far removed from the high-flying world of investment banking:

Ignore the rumor mill, and you can lose big.

A little more than a year ago, Bear's stock price had soared to a record $171 per share. Then came rising doubts about the subprime mortgage market. Thanks to mortgage investments gone bad, two of Bear's hedge funds went bust.

Next came the staff changes. First the co-president and co-chief operating officer resigned, followed by the long-time CEO. In December, the bank reported its first-ever quarterly loss, and the poor executives who remained had to do without their annual bonuses.

None of this was enough to bring on Bear's demise. The earnings jitters and executive shakeouts were not out of line with what was happening at other banks ( Citigroup ( C), for example, pushed out its CEO late last year).

But then rumors spread that Bear Stearns was in the midst of a cash crunch. The talk was so pervasive that CEO Alan Schwartz went on CNBC to squash it, saying the company had $17 billion in cash on the balance sheet.

"We don't see any pressure on our liquidity, let alone a liquidity crisis," he said, in a now-infamous quote.

Oops.

The rumors, it turned out, were true. The CEO's public reassurances did nothing to stop investors' panic, and they rushed to get their money out of the company -- only to find out the bank didn't have enough to cover those withdrawals after all.

The collapse, when it came, was swift and brutal.

So how can you stop rumors from taking your company down?

Andy Beal, a marketing consultant who specializes in online reputation management and is the author of the recent book Radically Transparent: Monitoring and Managing Reputations Online, says it's important for companies to continually monitor what is being said about them.

"The worst thing a company can do is stick its head in the sand and say they'll release information when they're ready," he says. "The market makes that decision for you."

One of Bears' key mistakes may have been to ignore the rumors for too long. By the time the CEO appeared on TV, it was too little, too late.

"When companies don't come clean, it's guilt by omission," Beal says. "In the absence of credible information, investors will fill that void with their own best guesses and follow the wisdom of crowds."

Beal points out that the Web site Technorati, which tracks blog postings and discussions, saw a huge increase in the number of bloggers writing about Bear Stearns in the week before its fall.

"If Bear Stearns had taken the opportunity to measure the conversation and the sentiment behind that conversation, they could have taken measures to make the fallout less severe," he says.

Remember that your customers and employees may be posting everything from office gossip to product complaints on their personal Web sites and blogs. You'd better know what they're saying so you can set the record straight on any inaccurate information.

Unfortunately, though, negative rumors can also be true.

Even if you'd rather not discuss something like a shaky bottom line or impending layoffs, once the word is out, you've got to address it. It may be the only way to retain the confidence of your customers -- and their loyalty.

Chances are your company will never face such a dramatic, public breakdown as Bear Stearns. But a small business may not be able to withstand even small cracks in its foundation.

Dealing with a rumor before it spirals out of control keeps those cracks from shattering the whole company.

Know What You Own: Bear Stearns operates in the financial services industry, and some of the other stocks in its field include Lehman Brothers ( LEH), Merrill Lynch ( MER), Morgan Stanley ( MS) and Bank of America ( BAC). These stocks were recently trading at ($42.36, -8.88%), ($42.83, -8.15%), ($43.73, +2.03%) and ($38.80, -0.33%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.
Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.

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