Watchdog or Mouthpiece? The Role of Financial News Media in Corporate Communication

Abstract

We investigate how financial news media coverage causally affects managers' manipulation decisions in corporate disclosures. While prior research shows that media coverage decreases manipulation incentives for "hard manipulation", such as accounting fraud ("watchdog role"), the role of the media for manipulating qualitative information, "soft manipulation", is ex-ante unclear; theory even predicts that news media may uncritically disseminate corporate information ("mouthpiece role"), thereby increasing managers' incentives for soft manipulation. Using a stacked difference-indifferences design based on restructuring events at the Wall Street Journal, we provide first empirical evidence that news media coverage reduces managers' incentives for soft manipulation. The effect is driven by articles with more editorial content and more pronounced for firms with less monitoring through other corporate governance mechanisms.

Keywords: financial media, managerial manipulation, corporate disclosure

JEL Classification: D82, G14, G34, M41