Media Managing Research Paper Overview

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Researchers often assume that a firm’s media coverage is an exogenous result of actual news about the firm. In this paper I show that firms actively manage the quantity of media coverage they receive, increasing coverage of good news and decreasing coverage of bad news. Firms do this media managing by including “media experts” on their board of directors. That is, coverage in the news media is, in part, a choice that firms make. Here is an example that describes the expectations of firms from media experts I consider in this paper:
In 1985, former Philip Morris chief executive Hamish Maxwell wrote the following in an internal memo: “A number of media proprietors that I have spoken to are sympathetic to our position – Rupert Murdoch
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Asset pricing literature argues that information asymmetry of this sort should cause discount rates to rise through liquidity channel (Kelly and Ljungqvist, 2009). I present evidence consistent with this interpretation using a difference-in-difference design — firms with media experts suffer an increase in cost of capital by 120 to 300 basis points per year that is attributed to liquidity beta. The finding that board member induced managed media coverage reduces liquidity beta complements the findings of other papers studying the liquidity impact of press coverage in other contexts (see Bushee, Core, Guay, and Hamm,2010; Solomon, 2009; and Soltes, 2009).
If having media on board increases future press coverage, but dampens asset prices through the liquidity channel, why would firms actively seek such board members? A simple cost/benefit analysis suggests that firms should get something out of having such people on board. Media experts may help hire better public/investor relation firms or consultants. In other words, such board members may provide connections to media and related industries (e.g., advertising, public relations). Given that advertising spending is also a big revenue item for media companies, firms would benefit from media expertise on board through efficient allocation of advertising expenditures. Consistent with this interpretation, I find reduction in cost of capital as measured by reduced exposure to Fama and French's HML factor. Because
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