External Governance and Capital Structure: Evidence from Media Coverage

Abstract

This paper examines how external governance pressure from the media affects capital structure. Using a comprehensive set of corporate news, we find a negative relation between media coverage and financial leverage. An instrumental variable approach suggests that the effect is causal. Cross-sectional tests indicate that the results are more pronounced when board or shareholder monitoring is weaker. We further find that the effect of media coverage is more pronounced for news related to executives (i.e., the news that are more likely to impose reputational costs on managers). Our findings are consistent with a substitution effect between the external governance imposed by the media and the discipline provided by debt financing.

Keywords: Media Coverage, Corporate News, Capital Structure, Leverage, Corporate Governance

JEL Classification: G14, G30, G32, G41