What happens when firms break promises? The case of information credibility

In this study, we use the promise-breaking events of listed companies as a proxy for information credibility and adopt the event-study method to examine the market reactions to changes in firms' information credibility. We then investigate the channels through which the effects of information credibility are transmitted to the stock market and examine the moderating effects of institutional shareholders and ownership concentration. Our empirical findings indicate that changing the purpose of the funds raised through Initial Public Offerings reduces information credibility, which leads to negative market reactions. Moreover, the market reaction is more pronounced when dominant ownership or institutional shareholders are present. The implications of our findings with regard to the quality of the information environment are discussed.