A Theory of Financial Media

Abstract

We present a model of media coverage of corporate announcements. Firms strategically use the media to communicate corporate announcements to a group of traders who do not observe announcements directly, but only through media reports. Journalists strategically select which announcements to report to their readers. Media coverage inadvertently incentivizes firms to manipulate the underlying announcements. In equilibrium, media coverage is tilted towards less manipulated negative news. The presence of financial journalists leads to more manipulation but makes stock prices more informative on average. We provide additional predictions regarding the media's impact on the quality of firm announcements and stock prices.

Keywords: financial journalism, disclosure, manipulation, price quality

JEL Classification: D82, G14, M40