A Theory of Financial Media
33 Pages Posted: 2 Oct 2019 Last revised: 7 Oct 2019
Date Written: September 20, 2019
Despite a growing empirical literature, which documents the economic importance of financial media, much of the existing theoretical work takes public financial news as a model primitive. In this paper, we develop a simple model in which financial media plays an economic role: many investors cannot observe the universe of all firm announcements and rely on a financial journalist to choose which announcements to report and which not to. The model explores implications for the behavior of the journalist, the manager, investors, and for stock prices. We find that the introduction of a journalist induces more informed trading by readers, but inadvertently incentivizes the manager to bias the firm's announcements. We argue that this bias arises in spite of the journalist, not because of her. Although the stock becomes mis-priced, readers are better off and prices are more informative. Finally, we find two endogenous biases: extreme financial news is more likely to be reported than mundane news and good news is more likely to be reported than bad news.
Keywords: financial journalism, manipulation, price quality
JEL Classification: D82, G14, M40
Suggested Citation: Suggested Citation