Abstract
We study how social connections between top executives of media and listed firms affect the properties of media reporting. We find that socially connected media are significantly more likely to cover a firm than their unconnected counterparts. Their reporting is significantly more optimistically toned and contains significantly less information, and both of these effects are significantly mitigated when the firm has better information environment as represented by greater analyst coverage and larger firm size. Additional analyses show that characteristics of the underlying news, firm, or media also affect the effects of social connections on media reporting properties. Collectively, our evidence suggests the impairment of media independence when media and firms have social connections and the importance of alternative information sources in mitigating this effect.
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09 December 2020
H2 was corrected. The word "decision" was replaced with "tone".
Notes
See FAIR Reports for examples of different kinds of conflicts of interest: https://fair.org/extra/14th-annual-fear-and-favor-review/, https://fair.org/article/media-coverage-of-religion/, and https://fair.org/extra/new-conflict-of-interest-at-nyt-jerusalem-bureau/.
For example, connected media can have access to private information that is otherwise unavailable, but such information may be communicated to the public with bias. Similarly, research on financial analysts has found that analysts bias their forecasts to obtain access to managers and issue more informative forecasts (e.g., Chen and Matsumoto 2006).
For example, see http://news.ifeng.com/a/20180730/59504361_0.shtml (in Chinese) for a report by the editor of China Youth Daily, titled “Many places have begun to taste the evil effects of the lack of media independence,” and http://news.ifeng.com/a/20180725/59398656_0.shtml (in Chinese) for guidelines by Party Secretary of Shandong Province that required the media in Shandong Province to strengthen their monitoring role.
Media CEOs are sometimes referred to with other titles, such as proprietors.
By “economic incentive,” we refer to incentives associated with certain business transactional relations in which one party pays something of value in exchange for something else of value from another party, such as incentives associated with advertising relations. Social connections typically are not motivated by receiving things of value but by one party intrinsically value the well-being of the other party, which is attributable to some common social characteristic, such as hometown or school. In Section 5, we provide some preliminary analysis of possible relations between social connections and one type of transactional relationship, advertising.
We note that, while social connections can foster personal relations, for social connections to affect media reporting properties, pre-existing personal relations between the executives are not a necessary condition. Mutual trust and empathy arising from the common background can influence media coverage even absent personal relations.
Journalists may directly receive coverage assignments from their superiors, and their writeups are always subject to final approvals from media executives. This is particularly true in China, where media executives have dominating power in the organization. For example, in the twenty-first Century Business Herald blackmail scandal in 2014, the former leader of the newspaper played an important role in leading and coordinating the illegality.
Since the yearbook is always published one year after the statistics are collected, information about media executives disclosed in the next calendar year is used for the current year.
In 2005, in a spirit similar to the Regulation Fair Disclosure (Reg FD) in the United States, the China Securities Regulatory Commission issued a guideline that requires fair disclosure to all investors or other potential interested parties by publicly listed firms. Nearly all of our sample period starts after the issuance of this guideline. To the extent that the guideline completely prevents private communication, it should work against the information hypothesis (with limited implications for the favoritism hypothesis). However, research in the United States (e.g., Solomon and Soltes 2015) has shown that, even after Reg FD, there continues to be evidence of selective disclosures. Thus how this guideline affects the information hypothesis is an empirical question.
We keep all observations as long as either educational background or birthplace can be identified. While there may indeed exist social ties that we could not identify due to missing information, we expect it to bias against finding results. As a robustness test, we keep only those observations for which both the educational background and birthplace information are available and find robust results. In addition, we also test the influence of school ties and hometown ties separately; the results are significant and consistent with our main results.
In untabulated analyses, we also control for indicators for elite colleges and top four cities as hometowns for both firm and media executives to rule out the possibility that a few observations from these backgrounds drive our results. Our results are robust to these controls.
In untabulated tests, we also use a dummy variable, which equals to 1 if a media outlet releases at least one news article about a firm in a given year and 0 otherwise. The results are qualitatively similar.
The variable ∑R(SCH) is constructed as follows. First, we determine the percentile rank of each university in terms of the number of firm and media executives that it has graduated, respectively, which we denote as R(SCH)_firm and R(SCH)_media. We then define R(SCH) as the average of these two ranks. A higher R(SCH) suggests that more media and firm executives have graduated from a given university. In particular, for universities that have never graduated a firm or media executive, we set its R(SCH) to zero, as social ties between media and firm executives can never emerge from these universities. Finally, we add up the values of R(SCH) of all the universities attended by the executives of each firm-year and denote the sum as ∑R(SCH). We calculate ∑R(HOM) analogously for hometown ties for each firm.
We perform several sensitivity tests for H2. We use alternative dependent variables: the nonstandardized tone and additional tone indicators, Tone_pos and Tone_neg, which represent the proportion of positive and negative sentences to all sentences in each news report. Our inferences remain unchanged. We also re-estimate our model using firm-media-year (firm-media-month) observations in which we average Tone on a yearly (monthly) basis to account for the different numbers of reports that a media outlet might publish about a firm each year (month). Our results continue to be robust.
As a robustness test, we also construct another sample requiring that at least one unconnected media outlet covers the same firm as the connected media within [−7, 7] days of each reporting date by the connected media, and the results are qualitatively similar.
When we use ABSCAR as our dependent variable, the inferences are unchanged.
For brevity, we report the results for the full sample only in Table 6. Propensity-score-matched results are qualitatively similar.
These results are broadly consistent with the insights of Fischer and Verrecchia (2000) on managers’ reports. Those authors suggest that managers’ reports become less informative as the private cost to the manager of biasing reports falls and as the uncertainty about the manager’s objective increases. In our setting, as information environment deteriorates, media bias is less likely to be detected, which decreases reputational costs to the media. The lower private cost of biased reports is expected to result in more biased and less informative news reports, which is what we observe. Our results in Panel D of Table 6 on central media versus regional media also comport with this argument.
Central media are those affiliated with the Propaganda Department of the Central Committee of the CPC, the State Administration of Radio, Film and Television, or the General Administration of Press and Publication.
We also perform a test that examines how our results differ between state-controlled media and other media based on the classification used in You et al. (2018). Untabulated results show no significant effects.
In addition to timeliness, we also examine the length of the news articles about the same underlying earnings announcements. We use log of the number of words (or sentences) in the news article to measure length and find that news articles by connected media contain significantly more words (or sentences). However, one should be cautious in interpreting this result. First, we find the economic significance of the difference is low (0.6% or 1.0% relative to sample mean). Second, when we regress ABSCAR or ABN_ABSCAR on the length of the article, we find that the coefficient on length is not statistically significant, suggesting that length may not be a good indicator of the informativeness of the news article.
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Acknowledgements
We are grateful for the comments and suggestions from Hui Chen, Qiang Cheng, Paul Fischer (editor), Umit Gurun, S.P. Kothari, Xu Li, Shuqing Luo, Eric So, Christina Zhu (discussant), Tony Tang, and participants from the workshops in Tsinghua University, XY Investments, the 2019 MIT Asia Conference in Accounting, and the 2019 Review of Accounting Studies Conference. Xue acknowledges the financial support from the National Natural Science Foundation of China (Grant number 71972115) and the Institute for State-Owned Enterprises of Tsinghua University. We remain responsible for all errors and omissions.
Funding
This project is partially funded by the National Natural Science Foundation of China (Grant number 71972115) and the Institute for State-Owned Enterprises of Tsinghua University.
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Ru, Y., Xue, J., Zhang, Y. et al. Social connections between media and firm executives and the properties of media reporting. Rev Account Stud 25, 963–1001 (2020). https://doi.org/10.1007/s11142-020-09552-x
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DOI: https://doi.org/10.1007/s11142-020-09552-x