Media report favoritism and consequences: A comparison of traditional and new energy sector

Highlights

• The paper examines the link between media report favoritism and corporate crash risk.

• Media coverage plays an important role in mitigating information asymmetry.

• Media coverage has an important effect on curbing managements' ability to hide bad news.

• Media coverage is increasingly effective in reducing crash risk among new energy firms and Non-SOEs firms.

Abstract

This paper investigates whether media report favoritism affects firm crash risk both in the traditional and new energy sector. Crash risk is caused by a suddenly outflow of a large amount of cumulatively hidden bad news. Media report favoritism mitigates firm information asymmetry and impairs managements' ability to conceive bad news to outsiders. We find that media report favoritism, measured by total number of news covering firm, significantly reduces the energy firms' crash risk for both traditional news and online news. Our results are robust for Heckman selection model and alternative measures of independent variables. Further, we find that the relation between media coverage and crash risk is more pronounced for new energy firms, non-SOEs firms, firms with higher analyst following, and firms with larger board size. These results indicate that media coverage could play a role in mitigating information asymmetry and reduces firm crash risk.

Introduction

The energy sector plays an important role in inflation, employment and industrial output (see, e.g., Abboud and Betz, 2021; Gong et al., 2021; Gong and Lin, 2018; Kilian and Park, 2009; Liang et al., 2019; Rickman and Wang, 2020; Wang et al., 2015; Wen et al., 2018). According to BP Statistical Review (2019), “China represents 24% of world energy consumption and 34% of world energy consumption growth in 2018” (p5). China is also the largest oil importing country and imported approximately 500 million tons of oil in 2019. However, as a developing country, China has an under-developed financial system. The corporate governance, accounting standards, investor protection and market surveillance are still in the process of development (Allen et al., 2005; Jiang et al., 2018; Li et al., 2020). One remarkable characteristic of China's securities market is the volatile stock price (Huang et al., 2021; Jian et al., 2018; Xiao et al., 2017; Xu et al., 2017; Yang et al., 2021). Unlike the mature markets, China equity market saw many times of crashes. For instance, Zhang et al. (2016) show that since the time that Shanghai Exchange was established, Shanghai composite index saw more than ten crashes since 1990. Another characteristic of China's securities market is its representation of State-Owned Enterprises (SOEs). SOEs still account for more than 50% of all listed firms at the end of 2019. Unlike private firms, top management of SOEs are usually nominated by the government, and they concern more about their political future than the market reaction. Given these unique characteristics, it is important to examine the crash risk for energy sector in China market.

Conceptually, crash risk is a sharp price fall in a short period and on a large scale (Dai et al., 2021; Kim et al., 2011; Kim and Zhang, 2016; Liu et al., 2021; Pan et al., 2021; Wen et al., 2019). Especially for energy firms, their stock prices are more likely to crash because of the nature of their operation. On March 11th 2020, the stock price of BP, Shell and Centrica slumped by 15% to 20% in just one day as the consequence of the oil price variation. Apart from oil price variation, other external shocks, such as change in government regulation, technology progression, legal action and shifts in the competitive environment may all influence the operations of energy firms which may eventually cause stock price crashes.

Given the unique attributes of energy section, we examine how media coverage affect the probability of stock crash of energy firms in China. In previous studies, researchers generally argue that crash risk results from cumulatively hidden bad news. Firm managers tend to hoard negative news, either due to career concern or agency issue (Kothari et al., 2009). When the hidden negative news becomes public knowledge, the stock will experience extremely sharp and rapid falls. Therefore, we expect that media, as an information provider, could play a crucial role in reducing crash risk since it might reduce the information asymmetry between firm managers and outside investors.

Following Jin and Myers (2006), existing empirical studies on crash risk mainly believe that higher information asymmetry between top managers and outside stakeholders result in stock price crash. Hutton et al. (2009) argue that information asymmetry, measured with a high-level discretional accrual, which is a proxy of information asymmetry, could cause stock price crash. Kim et al. (2016a) show that higher financial statement comparability could result in low price crash risk. Firm managers seem to switch from accruals management to real earnings management in the post -Sarbanes-Oxley period. And Francis et al. (2016) find that firms that engage in real earnings management, exist a higher probability of price crash and, especially, this effect is more substantial in the post- Sarbanes-Oxley period. DeFond et al. (2015) find that after the adoption of the international financial reporting standards (IFRS), firm’ stock price is less likely to crash, especially for those non-financial firm. In conclusion, more transparent corporate governance and better information environment could help mitigate stock price crash risk.

On the one hand, in China, the disclosure of information is still inadequate, and many A-share-listed firms have agency problems to a greater or lesser extent. In this scenario, we should expect the media, as an information provider, could play a more critical role as external monitor than in other countries. On the other hand, in China, the media is supervised by the government. They have to do self-censorship when reporting the news. Especially for the news about SOEs, the media should carefully review the content or sometimes even choose not to report in case of government dissatisfaction. This unique media environment may attenuate the monitoring effect of media in terms of information disclosure. Whether the media coverage could help reduce the crash risk in China? The answer is still unclear. However, little attention has been paid to this issue. The only related work is Qiao et al. (2018) where the authors find that CEO media exposure plays a negative role in stock price crash risk. But they don't look at the impact of media coverage directly. Neither did they separate the effect of media coverage from different sources, such as news in online media and newspaper.

Given the above analysis, we test our research questions: whether media coverage could help mitigate stock price crash risk among energy sector firms empirically. We further differentiate the media coverage by different sources. We obtain the media coverage data from Chinese Research Data Services Platform. And we collect stock price and firm characteristic data from the Chinese Stock Market and Accounting Research Database. Using 119 Chinese energy firms' data from 2008 to 2018, we find that media coverage is significantly and negatively related to energy firms' crash risk both for traditional news and online news. The finding supports the “monitoring effect”. Media coverage could play a role as external monitor by mitigating possible information asymmetry between firms and investors and thus impair managements' ability to hide bad news. Eventually, media coverage reduces the crash risk of energy firms in China. Our results are robust for different robustness tests. We find that if we only focus on original news and reconstruct our media coverage measures, traditional original news can significantly reduce crash risk but online original news does not significantly reduce crash risk. We also test the timing of media coverage and crash risk and we find that there is no much difference between news covering the firm at the first half year from news at the second half year. As for the potential endogeneity concern, we follow Wang and Ye (2015) and adopt a Heckman two-stage model. We find that our results are still robust.

Further, we find that the monitoring effect is more substantial among new energy firms. One of the most remarkable attributes of the energy sector is that their operations are susceptible to various exogenous shocks, like oil price variation, government regulation, technology progression and so on. Especially for traditional energy firms, their stock prices are very sensitive to oil price variation. A large fraction of traditional energy stock price collapses is induced by oil prices plummeting, instead of outflow of hidden bad news. Therefore the “monitoring effect” mainly works among new energy firms. Also, we find that the monitoring effect is more substantial among Non-State-Owned Enterprises (Non-SOEs). One reason could be that State-Owned Enterprises (SOEs) have close connection with the government, and they enjoy various favourable political and financial treatments from the government. This “helping hands” from government reduce the risk of financial distress and therefore reduce the risk of price crash. What's more, the top management of SOEs are usually appointed by the government. They concern less to the market reaction and have lower incentive to hide bad news compared to Non-SOEs. Hence, the monitoring function of media coverage would be weaker among SOEs.

Additionally, we investigate whether the “monitoring effect” is affected by the analyst following and board size. We show that for firms with a high level of analyst following, the baseline relation is more significant. This result is aligned with our hypothesis that media coverage could intermediate corporate information to the public and attenuate information asymmetry between insiders and outside investors. Besides, we show that the “monitoring effect” is stronger among firms with more board monitoring. This result consists with the notion that analyst following and board size both severs as governance mechanism and the effect of media coverage on reducing information asymmetry is more pronounce if firm has better corporate governance.

Our study adds to the energy economics literature in several distinct folds. We reveal a direct impact of media coverage favoritism on crash risk. This study contributes to the literature by providing support in favor of a positive role for social media (Mazboudi and Khalil, 2017; Bollen et al., 2011). Our results confirm that the media may act as type of governance control mechanism because media coverage plays a role as watchdog to mitigate information asymmetry between management and external constituents (Bednar, 2012). Besides, our findings contribute to the literature on examining the risk factors in in renewable energy firms and traditional energy firm. To the best of our knowledge, this is the first study that investigates the determinants of crash risk in the renewable energy industry. By employing a comparative assessment, the findings of this study reveal how renewable energy firms differ from traditional energy firms in terms of stock price dynamics and downside risk. Last, we differentiate the news covering from online sources and newspaper.

This paper is organized as follows. In the following section, we review the literature about information hoarding and crash risk and provide the hypothesis related to the influence of social media to stock price crash risk. We give the data and methods in Section 3. We discuss the empirical results in Section 4, and Section 5 discuss the additional analysis which includes the relation between media sentiment on crash risk. Section 6 concludes this paper.