The Misallocation of Corporate News

Abstract

This paper studies how the distribution of information supply by the news media affects the macroeconomy. We document three connected facts on media's reporting of firm news: corporate news coverage is highly concentrated, particularly among the largest firms; firms' equity financing and investments rise after media coverage; and yet these responses are largest among small, rarely-covered firms. We develop a heterogeneous-firm model with a media sector that matches these facts. Asymmetric information between firms and investors leads to financial frictions that constrain firms' financing and investments. Media's role in alleviating information frictions is limited by its focus on large and financially unconstrained firms. Reallocating news coverage, or allowing firms to buy coverage from outlets in a competitive market, leads to substantial increases in aggregate investment and output. The aggregate effects of media coverage therefore depend crucially on how that coverage is allocated.

Keywords: news media, asymmetric information, firm heterogeneity, macro-finance, misallocation, information frictions

JEL Classification: E22, G32, D82, L82