The Role of the Media in Corporate Governance: Do the Media Influence Managers’ Capital Allocation Decisions?

Abstract:     
Using 636 large acquisition attempts that are accompanied by a negative stock price reaction at their announcement (“value-reducing acquisition attempts”) from 1990-2010, we find that, in deciding whether to abandon a value-reducing acquisition attempt, managers’ sensitivity to the firm’s stock price reaction during the announcement period is influenced by the level and the tone of media attention to the proposed transaction. We interpret the results to imply that managers have reputational capital at risk in making corporate capital allocation decisions and that the level and tone of media attention heighten the impact of a value-reducing acquisition on the manager’s reputational capital. To the extent that value-reducing acquisition attempts are more likely to be abandoned, the media can play a role in aligning managers’ and shareholders’ interests.

Number of Pages in PDF File: 52

Keywords: Acquisition, Abandon, Capital allocation, Corporate governance, Media attention, Media tone, Reputational capital

JEL Classification: G31, G34

working papers series