The financial media provide information to investors by monitoring firms for fraud, excessive CEO pay, and other questionable behavior, as well as mundane 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. 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.

Why Should the Media Care About Investors?

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 a recent survey of financial journalists, over 83 percent of the participants state that monitoring companies to hold them accountable is one of the most important objectives of financial journalism. Thus, we expect the media to adjust their coverage of a firm based on the monitoring needs and abilities of its investors.

Debt vs. Equity investors – Who Relies More on Media?

A large amount of literature provides evidence that many debt investors, such as banks, monitor firms through private communication and therefore likely do not need to rely as much on public media coverage. Debt investors’ information advantage (relative to equity investors) stems from several factors, such as detailed covenants associated with loans or 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 United States. Consistent with this reasoning, we find that media coverage decreases as the proportion of a firm’s debt to equity (its leverage ratio) increases.

Do Media Cater the Same Way to All Types of Debt and Equity Investors?

The reliance on public information varies not only across, but also within, debt and equity investors. 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 a firm’s overall level of debt, 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.

Focusing on equity investors, we find that media coverage is increasing as institutional equity ownership increases, suggesting the financial media cater to institutions over retail investors. While retail investors also consume financial news, institutional investors hold the majority of corporate equity and debt securities, play a key role in monitoring firms, and make up a significant proportion of the financial media’s customers. Besides, retail investors tend to invest through a variety of institutional products, thereby delegating monitoring to institutional investors. Consequently, several types of news media are designed to specifically cater to institutions.

Even within institutional equity investors, there is substantial heterogeneity along several dimensions. Our analyses reveal that media coverage is increasing with 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. In contrast, media coverage is in fact decreasing with ownership by transient and dedicated institutions. Since both these investor types 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.

When Does Media Coverage Matter More?

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 with firms’ 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 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.

The Big Picture Takeaways of the Study

Our study makes several contributions. First, we provide evidence that the media substitute 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 do not merely run other (more) sophisticated monitors’ information, but rather seek to enable monitoring where needed. Second, a significant amount of research in this area has focused on the consequences of media coverage, whereas the determinants of the monitoring provided by media coverage are 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.

This post comes to us from Nicholas Guest, Ashish Ochani, and Mani Sethuraman at Cornell University’s Samuel Curtis Johnson Graduate School of Management. It is based on their recent paper, “The Media Goes Where They’re Needed: The Relation between Firms’ Investor Base and Media Coverage,” available here.