The Corporate Governance Role of the Media

This post by Luigi Zingales is part of the series of posts on corporate governance articles accepted for publication in prominent Finance Journals.

A forthcoming article in the Journal of Finance titled “The Corporate Governance Role of the Media: Evidence from Russia”, which is co-written by Alexander Dyck, Natalya Volchkova, and myself studies the effect of media coverage on corporate governance. The article focuses on Russia during the period 1999 to 2002 to answer two main questions: Can hedge funds (or shareholders in general) increase the level of coverage received by certain companies? And if so, does this coverage have any effect on corporate governance outcomes? The article develops four main conclusions:

  • News coverage is driven not only by the intrinsic appeal of each piece of news, but also by the lobbying effort exerted by those with an interest in the news being published.
  • Media coverage is not just a mirror of reality, but it can have important effects on reality itself, and in particular on corporate governance.
  • Media coverage is effective only when a behavior violates norms that are widely accepted in society.
  • The effect of media can be economically large—One more article in the Financial Times or the Wall Street Journal increases the probability of reversing a corporate governance violation by five percentage points.

The article notes that an egregious corporate governance violation is more likely to be covered by newspapers regardless of any effort by hedge fund managers, and it is also more likely to generate a reaction. To attempt to disentangle these effects, we employ an instrument—the portfolio composition of the Hermitage Fund, an investment fund that consciously played a media strategy in post-1998 Russia—to provide further evidence that there is a causal link from press coverage to the governance outcome.

The full article is available here.

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