Prof Studies Effect of Media Biases on Stock Values

A School of Management professor researching the effects of corporate news on stock prices has linked increased press coverage to the inclusion of media insiders on company boards of directors and, in a separate inquiry, found bias favoring companies in reporting by their hometown news outlets.

The findings in two studies by Accounting and Information Management Assistant Professor Umit Gurun break ground in that they represent “one of the first lines of research that quantifies influence and the effect of corporate news on firm values,” he said.

For investors, the results suggest several caveats: Beware potential distortions in corporate news. Be cautious in expectations of so-called independent board members—including media professionals. Be prudent and seek independent views—outside the media—about companies both before and after investing in them.

In “Good News Is Endogenous,” his work about corporate boards with media experts, Gurun searched a database of 40,000 board-member résumés to identify editors, journalists, media-company owners and media-company board members who both held an ownership stake in a public firm and served on its board of directors. This yielded a list of approximately 625 individuals over a 10-year period from 1996 to 2006.

Presenting results to fellow faculty members, he showed that companies with media professionals serving on their boards of directors influence the quantity of coverage they received. Overall, board membership of media pros leads to more news about that company, Gurun found. Even the most conservative estimates showed press coverage increased 10 percent per year with an insider on the board.

Possible explanations? Media experts might help hire better public relations consultants, provide inside connections, suggest ways to improve efficiency of advertising budgets. Media experts also may prove helpful in spreading company news to a wider audience.

However, in earnings disclosure periods, Gurun found, media insiders have little to no effect on reportage. “There is more objective—unaffected—truth during disclosure periods,” he said, because “the hard numbers are there. Investors can interpret numbers without help.”

But in the absence of earnings news, in the intervals he dubbed “quiet periods” between disclosure announcements, “media outlets rely on information sources that are likely to be managed by firms.”

When this happens, the questions that arise include: “Is it really good news they are emphasizing, or are they suppressing bad news?”

From the investor’s vantage, Gurun said, the caution at that time is that “you should consider the possibility that this coverage is not really free of a firm’s intervention.”

In a second study, which Gurun undertook with Rice University faculty member Alexander W. Butler, the researchers found not only that reporting favorable to companies is more pronounced at the hometown level but also that the bias proved stronger for companies with higher local advertising expenditures.

In “Don’t Believe the Hype: Local Media Slant, Local Advertising, and Firm Value,” Gurun and Butler measured bias by counting the number of positive and negative words in the lead paragraphs of more than 360,000 firm-specific news stories that appeared between 2002 and 2006 in The Wall Street Journal, on the Dow Jones News Service and in eight local newspapers: The Boston Globe, Chicago Sun-Times, Denver Post, Pittsburgh Post-Gazette, San Francisco Chronicle, Seattle Post-Intelligencer, St. Louis Post Dispatch and Washington Post. 

They have delivered their findings several times, including at the American Finance Association 2010 Atlanta meeting in January and more recently at Georgia State University, Michigan State University, the University of Alabama and Southern Methodist University.

On average, Gurun and Butler found that when the media report news about companies headquartered nearby, “they use fewer negative words compared to the same media reporting about non-local companies.”

Local media may be overly favorable to local firms for several reasons, Gurun and Butler theorized. One is that “employees of local firms are more likely to be the audience of local newspapers. If these employees demand favorable news about their company, then the local media may cater to them.”

A second reason—and the one the professors found more compelling—has to do with advertising. “If local firms are more likely to provide a significant amount of local media revenues, then it is possible that local media may self-select the tone of the news to protect its future revenues.”

When the research partners linked positive stories to advertising expenditures, their results supported the notion “that local media has more slant for firms advertising more heavily in local newspapers.”

Referring to the positive slant as “hype,” Gurun and Butler also investigated whether it affects a company’s stock-market valuation.

They found that bias has the strongest economic influence when stories involve small firms, firms with low liquidity, firms that receive little analyst coverage but whose analyst forecasts are widely dispersed and firms that largely are owned by individual—as opposed to institutional—investors.

Their evidence showed bias is “economically meaningful,” they wrote, “as firm values are related to the slant of both national and local newspapers.”

They concluded this finding may help explain why people tend disproportionately to invest in companies that are geographically near them.

Noting that “no study in finance literature paid attention to local media before ours,” Gurun observed that if you invest locally and get your information primarily from local newspapers, “you more likely are getting positive news, not negative” about your stakeholder companies.

But if investors do not take into account “that bad things could be happening” in local companies, if they do not consider the hype, and if they rely solely on local news to make buying and selling decisions, he added, they “will indeed suffer.”

“These results identify a source of systematic media biases,” they conclude. “Consumers of news can use this information to discount news content accordingly.”