The Effects of Managers’ Strategic Responses to Media-Disclosed Negative Information on Investors’ Judgments

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Abstract

We investigate the effects of strategic disclosure choices managers face when negative information about their company is made public by the media. We find that investors’ judgments about a company as a potential investment are more negative when they encounter negative information about the company in a management-issued disclosure prior to observing the information in an article from the media, compared to when they encounter management’s disclosure after the media article. Our results also suggest investors’ investment judgments are most favorable toward the company when it remains silent, compared to when the company either gets ahead or responds after the media article. We also provide evidence that a company can increase investors’ adoption of the media’s framing of the bad news when they get out ahead of it, which in turn, leads investors to judge the company as a less attractive potential investment. Our study contributes to practice by documenting that getting out ahead of a media disclosure of negative information can be more harmful than responding after the media or remaining silent. Our study also contributes to research that considers the media as an information intermediary for capital market participants and to theory about how the order in which investors encounter disclosures can influence investors’ judgments.

Authors

• Kirsten Fanning, University of Illinois-Urbana-Champaign

• Kevin E. Jackson, University of Illinois-Urbana-Champaign