Does Negative News Disclosure Induce Better Decision-Making? Evidence from Acquisitions

We examine the effect of negative news disclosures on managers’ acquisition decisions. Using electronically disseminated press releases and a textual analytics engine, we find that the percentage of negative news disclosed by a firm reduces its probability of undertaking acquisitions. However, for firms that do undertake acquisitions, the percentage of negative news disclosed before announcement is positively related to acquirer abnormal returns. Furthermore, 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 heightened following negative news development, managers undertake more prudent acquisition decisions