With a grain of salt: Investor reactions to uncertain news and (Non)disclosure

Abstract

We examine how external news with uncertain precision influences investor beliefs, market prices, and corporate disclosures. We find that good external (and public) news is taken with a grain of salt—specifically, it is perceived as unlikely to be precise—confirming investor beliefs that nondisclosing managers are hiding unfavorable (private) information. As a result, better external news may paradoxically lead to lower market valuation. Overall, we find that, amid management silence, equilibrium stock prices are nonmonotonic in (and react asymmetrically to) external news. We also predict that the probability of disclosure depends on the timing of the disclosure, the positivity of external news, and the financial strength of the industry.