Does negative news disclosure induce better decision-making? Evidence from acquisitions

Abstract

We examine the effect of negative news disclosures on acquisition decisions of firms. Using textual analysis of company press releases, we find that the percentage of negative news disclosed by a firm reduces its probability of acquisitions. However, for firms that do undertake acquisitions, the percentage of negative news disclosed is positively related to announcement-period abnormal returns. Consistent with theoretical predictions, this positive relationship is more pronounced for acquirers with low pay-performance sensitivity and those operating in concentrated industries. Overall, our results suggest that when managerial reputation concerns are high following negative news development, they make more prudent acquisition decisions.