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Is all publicity good publicity? For once, the question does not concern branding, but financing. And yes, media coverage of a company can indirectly influence its sources of financing, via visibility and governance effects. Alberta Giuli and her co-author have uncovered the decisive factor behind these effects: the presence of a board member with media ties.

When top businessmen gain a footing in media companies, it makes the news, like when Amazon founder Jeff Bezos buys The Washington PostSalesforce founder Marc Benioff and his wife Lynne acquires Time magazine or Daniel Kretinsky, owner of Central Europe's largest energy group, takes a stake in newspaper Le Monde, magazines like Elle and Marianne or TV station TF1. More recently, Tesla and Space X CEO Elon Musk made an offer to buy Twitter.
In those cases, headlines usually focus on potential consequences on the medium or more broadly, on press freedom. But reversing the perspective, what is the opposite relation, i.e. the effect of a media-linked member of the board on the other (non-media) company?

Research has already shown that members of boards of directors who also sit on the boards of major newspapers positively affect media coverage of their firms, in the sense that they get more coverage than others. Looking at a longer chain of outcomes, a duo of researchers examined how media-linked directors, through this effect on news, play a role in the financing of the firm, as news coverage has been shown to affect both firms' equity and debt. ESCP Business School’s Alberta Di Giuli and the University of Delaware’s Paul A. Laux broadened the scope to include all types of media (not only newspapers but also publishing, TV and radio). By carrying out an empirical study of 32,000 firm-years over 2003-2017 picked up by the Harvard Law School Forum on Corporate Governance, they were able to investigate the mechanisms through which the presence of media-linked directors influences financing and external governance.

Headlines help attracts investors

The researchers examined a first hypothesis, that of a visibility effect due to increased media coverage. They drew their results from the RavenPack data service, which covers all news stories and press releases reported by the Dow jones Newswires, regional editions of the Wall Street Journal, Barron's and MarketWatch for more than 40,000 companies around the world. And indeed, one of their key findings was that the presence of a media-linked director is positively associated with the number of news stories about the firm. The slant of news on the other hand (i.e. the fraction of positive-spin news items) is only marginally affected. According to the researchers' analysis of directors' backgrounds, the most likely explanation for the media-linked director's ability to boost media coverage is their network of connections in the media world - more than their expertise. 

So what exactly happens when a company is in the spotlight? Most obviously, visibility – regardless whether the coverage is favorable or not – fosters familiarity. This in turn enhances attractiveness for equity investors and possibly for lenders. Investors tend to buy shares that “grab the attention” of retail investors via media coverage, note the researchers. For instance, previous studies have shown that “retail investors disproportionately buy mutual funds that are highlighted in the Wall Street Journal Kings column feature,” they write. (To accurately measure the effect of the news flow on equity, they excluded news regarding financing events and issues from their data.)

While this visibility idea has a long tradition in the finance literature, the researchers took an extra step in observing the chain of outcomes that results from it.

Media scrutiny as a form of governance

Professors Di Giuli and Laux hypothesized that the increased news flow about the firm may serve as an external governance mechanism in the sense that by producing objective information about the firm, the media act as a watchdog. This in turn would allow firms to shift towards less governance-intensive forms of financing. Regarding equity, it means a lower fraction of the type of owners most likely to actively monitor the firm, such as blockholders (who hold substantial amounts of capital and thus wield significant influence through to voting rights). Concerning debt, bonds (the public debt market) are considered less monitoring-intensive than bank financing. With secured loans for example, banks obtain access to detailed information regarding the state of the collateral. This monitoring on the part of banks has a corporate governance role.

Indeed, the results of the study showed that media-linked director presence is associated with an increase in new bond financing, a decrease of new secure loans being established and a decrease in the balance sheet proportion of financing from bank loans overall (term loans and credit lines). The hypothesis of a lower proportion of blockholders was also verified by their data. “The economic magnitude of these results is strong, with media-linked director presence being associated with a change in financing that is from 5% to 41% of a standard deviation unit in absolute value,” write the two professors. While direct visibility does unlock access to capital, the governance effect appeared much stronger and more consistent.

However, they did not uncover any evidence of correlation between media-linked directors and seasoned equity offerings. They supposed that from a governance perspective anyway, ownership structure influenced monitoring more than the amount of equity itself.

A shift from internal to external governance

Overall, the results demonstrate the link between the internal governance set-up of a firm – here, media-linked directors – and related elements of its external situation, such as transparency. The financial implications are important, as increased news coverage substitutes for direct monitoring by capital providers. Such shifts appear to benefit the firm to the extent that monitoring costs are avoided while sufficient outside external oversight is maintained, conclude the researchers.