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E-MailJonas Heese is Marvin Bower Associate Professor of Business Administration at Harvard Business School; Gerardo Pérez-Cavazos is Assistant Professor of Accounting at UC San Diego Rady School of Management; and Caspar David Peter is Associate Professor of Accounting at Erasmus University Rotterdam School of Management. This post is based on their recent paper, forthcoming in Journal of Financial Economics.
Is the local press an effective monitor of corporate misconduct? Examining this question is important as over the last two decades the circulation of local newspapers in the United States has decreased by nearly 50% according to the Pew Research Center. A concern is that less local news results in less local accountability and investigative reporting, and therefore increased local corruption and crime. Yet, little is known about whether the decline in local newspapers affects corporate misconduct. We study this question by examining the effects of local newspaper closures on facility-level violations of publicly listed firms using a dataset that encompasses a wide range of violations, such as workplace safety violations, environmental violations, and securities fraud.
Effects of Local Newspaper Closures
From a theoretical standpoint, the effect of local newspaper closures on firms’ legal violations is ambiguous. On the one hand, the local press could be an effective monitor of firms and hence affect corporate misconduct via investigations or dissemination. For example, similar to the national press, the local press could undertake original investigations to detect corporate fraud. Local newspapers may be especially effective in discovering the misconduct of local firms because of their proximity to local sources such as employees and local suppliers. The local press could also affect corporate misconduct by widely disseminating information about misbehavior.
Alternatively, local newspapers may be an ineffective monitor of firms’ behavior for at least three reasons. First, local newspapers have incentives to avoid or slant reporting on local firms as they rely on local firms for advertising income. In addition, the press caters to its readers. Thus, local newspapers may refrain from reporting critically about local companies, which are frequently large employers, to avoid the risk of upsetting their readers and possibly losing subscription income. Second, local newspapers often have constrained resources in terms of the number of reporters investigating local misbehavior. Third, local newspapers are typically limited in their reach, potentially reducing the impact of their reporting and hence rendering its monitoring ineffective.
Empirical Analysis and Results
To examine the effects of newspaper closures on corporate misconduct, we exploit the closure of local newspapers over time. These closures serve as a proxy for shocks to the strength of monitoring by the local press because they cause large discrete reductions in local coverage of firms’ activities. To measure corporate misconduct, we use a data set from Violation Tracker covering a wide range of federal violations and the resulting penalties issued by 44 agencies. The data specify the geographical location of the facility in which the misconduct occurred, which enables us to identify the violations that occur in the coverage area of local newspapers. Our sample includes 26,450 violations perpetrated by 10,647 unique facilities of 1,383 Compustat firms, including approximately 80% of Fortune 100 and Fortune 500 firms, for the period 2000 to 2017.
We find that local newspaper closures lead to increased facilities’ violations and penalties in the ensuing three years. Specifically, the number of violations increases by 1.1% and penalties increase by 15.2%. These magnitudes are economically significant. For the average facility, they represent approximately 0.95% of facility-level sales. These findings indicate that local newspapers are an important monitor of corporate misconduct.
Conclusions
Our study provides the first systematic evidence showing that the local press is an effective monitor of corporate misconduct. This is an important finding, as prior studies suggest that local newspapers are ineffective monitors of local firms’ behavior. We show that local newspaper closures increase facility-level misconduct, highlighting the importance of local newspapers as monitors to curtail corporate misconduct. Our study also extends prior research by documenting the monitoring role of local newspapers on a wide range of corporate violations that resulted in penalties, including securities law violations, environmental violations, consumer-protection violations, and workplace safety violations, among many others. Thus, our study provides a comprehensive analysis of the effect of local newspapers on firms’ misconduct.
Finally, our findings improve our understanding of the consequences of reduced local newspaper coverage—an important topic in light of the decline in local newspapers in the United States. A major concern is that less local news leads to more local corruption and crime. Our study provides evidence consistent with this concern as we document that reduced local newspaper coverage affects firm behavior through increased misconduct.
The full paper is available for download here.
