The Role of Financial Media in Corporate Financing
University of Maastricht - Faculty of Economics & Business Administration
March 18, 2009
Financial media are the most common information sources for retail investors. This paper investigates the reputation effect of financial journalists on capital markets. As the current financial crisis gets worse, the financial press has benefited from the economic plunge since both old and potential investors are eager to know whether they can recover from their losses and when is the right time to start buying. Nevertheless, recent surveys reveal that the news media's credibility has plunged broadly and steadily.
The surge in readers and viewers for online, printout and broadcasting financial news indicate that the public believes that financial journalists have access to companies' private information. In the meantime, it is well acknowledged that financial media may spin the news to cater to the preferences of the readers or to pursue its own interests. Consistent to that fact, research shows that investors digest the media-released information with caution and investors' decisions are influenced by the media even though they are aware of the existence of media manipulation. It leaves us the following questions that have not been paid much attention by economists so far: How rational investors de-bias the information provided by the media based on their belief about the media's credibility? How such belief is incorporated into share prices? Would the media's reputation have impact on its reporting strategy and on the decision-making of other market players, such as equity issuers?
The model considers an issuing firm that may bribe a journalist in exchange for favorable commentaries. Investors price the new shares based on their belief on a journalist's honesty. The results show that the higher the journalist's reputation, the higher will be the issuing price. There is also an positive relation between a journalist's reputation and the amount of the bribe. Competition in the media market can improve the investment efficiency only if an honest journalist exists. If investors have doubt on the integrity of the journalist, publishing favorable reports damages his reputation even if the reports are accurate. To retain his credibility in the long run, an opportunistic journalist does not mimic the honest type, but rather randomizes his strategies between colluding and writing excessively critical articles. The results have implications for the regulation of financial media.
Number of Pages in PDF File: 36
Keywords: Financial media, Reputation, Collusion, Stock prices
JEL Classification: C26, D74, G12
Date posted: March 23, 2009
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