Timing the Market: Fake News and Seasoned Equity Offering Decision

Abstract

This paper studies how fake news makes firm-level stock price impact and examines affected firms’ strategic responses. Using data on fake news identified by the SEC, we analyze the effect of fake news on the price and behavior of affected firms. First, we find that firms treated by falsely positive news have significant positive abnormal returns around the news announcement. In addition, the cumulative abnormal returns (CARs) of affected firms persist for a long time. These results suggest that fake news makes a long-standing overvaluation on affected firms’ stock prices. We then study how affected firms react to fake news treatment. By estimating a difference-in-difference model, we find that treated firm increases the probability by 1.6% to file a seasoned equity offering (SEO) after the fake news announcement than control firms, controlling for a series of firm characteristics and fixed effects. In terms of magnitude, the probability of having an SEO conditional on fake news treatment is eight times the unconditional probability. Overall, we provide a novel source of overvaluation that significantly triggers a firm’s market timing decision and support the notion of market reception on the timing of equity issues.

Keywords: Fake News, Market Timing, Capital Structure, Seasoned Equity Offering

JEL Classification: G32