The financial media provides information to investors by monitoring firms for malfeasance, such as fraud and excessive CEO pay (Miller, 2006; Core, Guay, and Larcker, 2008). The media also helps investors monitor more mundane corporate activities, such as periodic earnings announcements. However, it is unclear why certain firms get extensive media coverage, along with the resulting benefits, while most do not. Prior studies focus on media, manager, and firm characteristics when examining drivers of media coverage, but largely overlook the firm’s investors, who are key monitors of firm performance and significant consumers of firm-specific news. To fill this void, we examine the extent to which media coverage varies with firms’ investor base. Specifically, we study in our paper whether and to what extent different types of debt and equity investors, who all vary in their reliance on publicly available information, influence media coverage. We find that media coverage is greater when a firm’s ownership is concentrated among institutional debt and equity investors that rely more on public information for monitoring.
Investors rely on both public and private information when trading and monitoring their assets, but not all of them gather and use information the same way. Some tend to monitor firms more aggressively, have access to more privileged sources of information, and process information more efficiently and effectively. Such investors are less likely to rely on media coverage when monitoring firms. In contrast, the media’s coverage is likely to be of particular benefit to investors who rely primarily on public information due to their limited ability or desire to gather, generate, or process private information. In the survey of financial journalists by Call et al. (2021), over 83% of the participants state that monitoring companies to hold them accountable is one of the most important objectives of financial journalism. About 63% report that they are very likely to use private phone calls with company management to help develop articles. Thus, we expect the media to adjust their coverage of a firm based on the monitoring needs and abilities of its investors.
Alternatively, it is possible that the media might not focus their coverage where it’s most needed for several reasons. First, many institutions are secretive and opaque, so the media may not be aware of their information endowments and needs. Second, the media often relies on more sophisticated monitors to provide information for their articles and, as a result, might not be able or willing to cover firms in which sophisticated stakeholders are few and far between. Third, media makes coverage decisions based on salient performance characteristics of the firm, such as earnings and stock returns, so they might not even be paying attention to the makeup of the investor base. Thus, it is ultimately an empirical question whether and to what extent media coverage varies depending on firms’ investor base.
We begin our analyses by exploring how media coverage varies for U.S. public companies based on fundamental capital structure, i.e., debt vs. equity. A large amount of literature provides evidence that many debt investors, such as banks, monitor firms through various private communication channels (Boot, 2000; Norden and Weber, 2010), and therefore likely do not need to rely as much on public media coverage. Debt investors’ information advantage (i.e., relative to equity investors) stems from several factors, such as detailed covenant structures associated with loans/bonds, the presence of privileged intermediaries (e.g., credit rating agencies), and direct access to management. In addition, they tend to concentrate their holdings, requiring them to monitor relatively few firms at a time. On the other hand, equity investors typically rely on public information to a greater extent, especially since Regulation Fair Disclosure was implemented in the U.S. Consistent with this reasoning, we predict and find that media coverage is decreasing in the proportion of debt ownership relative to equity ownership (i.e., the firm’s leverage ratio).
Of course, there are a host of factors such as popularity, performance, and investment opportunities that likely determine the firm’s capital structure decisions and the media’s coverage decisions. In a similar vein, investors’ ownership decisions are likely determined by several fundamental characteristics of the firm that might also influence media coverage. In addition, reverse causality is also a cause for concern. For example, the extent and sentiment of mediacoverage can influence investors’ willingness to hold certain types of securities. Inadequate control for these factors in empirical estimations can result in biased estimates and inappropriate inferences. Thus far, we have two major inferences based on our analysis. First, media coverage varies based on capital structure, i.e., coverage decreases in leverage. Second, media coverage varies in the extent to which the investor base is sophisticated, i.e., in their ability to access and process private information. To bolster these inferences and mitigate the aforementioned concerns, we examine two separate events that affect firms’ capital structure and investors’ access to private information, respectively.
First, we exploit a decrease in leverage created by the 2017 Tax Cuts and Jobs Act (TCJA), following prior research. We find that firms whose leverage decreased due to the TCJA experienced an increase in media coverage relative to firms that were not impacted by the TCJA. This finding increases our confidence that lower leverage leads to higher media coverage. Second, we exploit the creation of institutional dual-holders, wherein institutional investors that own substantial equity in a firm subsequently become lenders. When an equity investor becomes a lender, they gain access to private information from management (that was previously unavailable to them) owing to the newly established lending relationship. As a result, becoming a dual-holder likely reduces an investor’s need to rely on the media for monitoring. Consistent with this reasoning, we find that media coverage decreases following loan originations that result in additional dual-holders. This evidence complements our prior findings and arguments about the media catering to investors who rely more on public sources and are not privy to privileged information stemming from close communication with firm management.
The reliance on public information varies not only across, but also within, debt and equity investors. Thus, focusing first on debt, we explore variation within each of the major types of ownership claim. Specifically, private debt holders, such as banks, often have privileged access to management and, as a result, rely less on public sources of information such as the media. In contrast, a public bond includes investors (e.g., pension and insurance funds) whose information is limited to public sources, such as firms’ disclosures, credit ratings, and media coverage. Holding constant the overall level of debt in a firm’s capital structure, we find that media coverage is lower for firms with higher private debt, consistent with media coverage declining as the sophistication of the investor base increases due to private information access. This finding is consistent with lenders demanding more public information when they are less likely to have private information.
Focusing on equity investors, we find that media coverage is increasing in institutional equity ownership, suggesting the financial media caters to institutions over retail investors. On one hand, this result is not surprising because institutions make up perhaps the largest and most lucrative segment of the potential audience for financial information. For example, 38% of the revenue earned by Dow Jones (a division of News Corp.) in 2019 and 2020 was from their professional information business segment, which offers high-priced products geared towards institutional investors. On the other hand, our finding seems counterintuitive given retail investors’ relative lack of sophistication and our overall argument that the media caters to informationally disadvantaged investors. Nevertheless, it appears the primary target audience of financial media is institutional investors that directly hold a majority of corporate equity securities as opposed to retail investors, who often delegate monitoring to institutional investors.
Even within institutional equity investors, there is substantial heterogeneity along several dimensions. Our analyses reveal that media coverage is increasing in equity ownership by quasi-indexers, who invest in a multitude of firms and hence find it costly to acquire private information. Such investors depend on high quality public information for monitoring firms. Interestingly, unsophisticated retail investors make up a large portion of the clientele of quasi-index funds. Thus, the media seemingly caters to non-professional investors indirectly by providing substantial coverage for firms with a large quasi-index investor base.
In contrast, media coverage is in fact decreasing in ownership by both transient and dedicated institutions. Dedicated institutional investors often dedicate several years (by definition) to building close relationships with the few firms in their portfolio. Transient investors are known to employ sophisticated strategies by performing both technical and fundamental analyses using information from several sources (e.g., financial statements). Since both dedicated and transient investors are quite sophisticated in their approach to gathering and using information, we do not expect them to rely on the media’s information as much as quasi-indexers. These analyses provide additional support for our argument that the media provides coverage for those institutional investors that rely on public information for valuing firms and evaluating managers, i.e., where it is needed most.
While our study mostly emphasizes different types of investors who may or may not rely on media coverage, it is conceivable that any given investor may benefit from the media’s help covering some investments more than others. In particular, we find evidence consistent with the media catering to investors more when there is greater uncertainty associated with a firm’s securities, suggesting the media caters to investors who most need their help by providing it precisely when they need it. Interestingly, we also find nuanced evidence that the media’s production of debt-specific articles is increasing in leverage, which is intuitive and partially counteracts the overall negative association between leverage and media coverage that we document. Finally, we find that our results are somewhat unique to traditional media coverage (i.e., full articles) catering to financial market participants and monitors, and do not apply to non-traditional media outlets (e.g., blogs, social media) and flash alerts that cater to varied audiences.
Our study makes several contributions to the literature. First, we provide evidence that the media substitutes for monitoring by more specialized investors (e.g., banks and dedicated institutional investors) by equipping less sophisticated investors (e.g., bond holders and quasi-indexers) with easily accessible and relevant information. Our findings suggest that the media does not merely rebroadcast other (more) sophisticated monitors’ information, but rather seeks to enable monitoring where needed. Second, a significant amount of research in this space has focused on the consequences of media coverage, whereas the determinants of the monitoring provided by media coverage are relatively less understood. We extend this line of research by documenting that the composition of a firm’s investor base is an important driver of media coverage. Finally, our paper also contributes to the corporate disclosure literature by highlighting that media coverage complements the gamut of voluntary and mandatory corporate disclosures that investors rely on for monitoring firms and evaluating managers.
Nicholas Guest is an Assistant Professor at Cornell University, Samuel Curtis Johnson Graduate School of Management
Ashish Ochani is a PhD Student at Cornell University, Samuel Curtis Johnson Graduate School of Management
Mani Sethuraman is an Assistant Professor at Cornell University, Samuel Curtis Johnson Graduate School of Management
This post is adapted from their paper, “The Media Goes Where They’re Needed: The Relation between Firms’ Investor Base and Media Coverage” available on SSRN.
The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.
