The Feedback Effect of Disclosure Externalities

• In Event: Disclosure and Asset Pricing

Abstract

Information about one firm has the potential to affect the stock price of another firm. We investigate whether managers recognize this potential and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures around all-cash acquisitions, we find that acquirers originate more negative news articles during merger negotiations when there exist positive information spillovers between the acquirer and target firms. In contrast, acquirers originate more positive news articles during negotiations when there exist negative information spillovers between the two firms. The strategy generates a short-lived walk-down in the target firm stock price during the period when the takeover price is determined, substantially reducing the cost of the investment for the acquirer. Our results are consistent with the timing and content of disclosures being influenced by firms seeking to manipulate the stock prices of other firms.

Authors

• Jinhwan Kim, Massachusetts Institute of Technology

• Ben P Yost, Boston College

• Rodrigo Verdi, Massachusetts Institute of Technology