  We examine how uncertain veracity of external news influences investor
beliefs, market prices and corporate disclosures. Despite assuming independence
between the news' veracity and the firm's endowment with private information,
we find that favorable news is taken ``with a grain of salt'' in equilibrium --
more precisely, perceived as less likely veracious -- which reinforces investor
beliefs that nondisclosing managers are hiding disadvantageous information.
Hence more favorable external news could paradoxically lead to lower market
valuation. That is, amid management silence, stock prices may be non-monotonic
in the positivity of external news. In line with mounting empirical evidence,
our analysis implies asymmetric price reactions to news and price declines
following firm disclosures. We further predict that external news that is more
likely veracious may increase or decrease the probability of disclosure and
link these effects to empirically observable characteristics.
