When they say ‘not affected’, what do they mean? Evidence from trade disputes

This paper investigates the effects of trade dispute investigations against China initiated by foreign countries on corporate textual disclosure strategies. We demonstrate that firms involved in trade dispute investigations tend to strategically use whitewashed words to indicate that they are unaffected or little affected by trade disputes. This interesting effect is enhanced when these firms face a worse market reaction, a more negative media environment or a weaker external environment, such as fewer institutional investors or a less developed market. We further document that when firms affected by multiple investigations and multiple countries, they are more likely to strategically use whitewashed words. Consequently, a change in textual disclosure leads to a positive market reaction and insider sales. Overall, the results show that firms involved in trade dispute investigations adjust their information disclosure strategies to eliminate the negative impact of trade disputes and improve their market valuation. Our research sheds light on textual disclosure strategies in the face of an exogeneous shock. It highlights the need for regulators and investors to carefully interpret corporate disclosure.