Stock Underpricing and Firm News Disclosure

Using a sample of 77,036 firm-quarters, we test whether firms change their news disclosure when experiencing an exogenous negative shock to their stock price. We use mutual fund flow-induced selling pressure to measure exogenous undervaluation and classify news as positive and negative based on textual analysis. Our results show a robust negative relationship between mutual fund flow-induced selling pressure and the volume of negative news and a positive relationship between selling pressure and the volume of positive news. Thus, management appears to be aware of undervaluation resulting from an exogenous shock and responds by delaying the release of bad news while speeding up the publication of good news. This link between selling pressure and news releases is stronger for larger, high-valuation, and equity issuing firms. We further show that firms postpone the release of bad news from the selling pressure quarter to subsequent quarters. Our results demonstrate that news disclosure may be biased by firms seeking to support their stock price.