Media Coverage and Debt Financing

Abstract

We examine whether media coverage influences firms’ debt financing and, more importantly, the channels through which it occurs. We find that more media coverage significantly reduces firms’ reliance on bank loans while increasing their nonbank debt financing. This effect is concentrated among firms with more information available from other sources, suggesting that the media complements other information sources, and among firms with a higher demand for external monitoring, suggesting that the media substitutes for other governance mechanisms. News sentiment predicts subsequent credit ratings and firm value changes and affects access to new debt financing. Our findings validate the media’s role as one of providing supplemental information: it supplies additional information content after controlling for other information sources. We also find that, as negative news coverage increases, firms opt for the private placement of debt over pubic bonds and bank debt and report significantly negative discretionary accruals. These additional findings lend further support to the media having a governance effect.

Keywords: Media Coverage, Debt Structure and Choice, Corporate Governance, Information Asymmetry

JEL Classification: D82, L82, G21, G23, G32