The Governance Effect of the Media’s News Dissemination Role: Evidence from Insider Trading
Australian National University (ANU)
UNSW Australia Business School, School of Banking and Finance; UNSW Business School; Financial Research Network (FIRN)
Bohui Zhang
University of New South Wales (UNSW) – School of Banking and Finance; Financial Research Network (FIRN)
Abstract:
We investigate whether the media plays a role in corporate governance by disseminating news. Using a comprehensive dataset of corporate and insider news coverage for the 2001-2012 period, we show that the media reduces insiders’ future trading profits by disseminating news on prior insiders’ trades available from regulatory filings. We find support for three economic mechanisms underlying the disciplining effect of news dissemination: the reduction of information asymmetry, concerns regarding litigation risk, and the impact on insiders’ personal wealth and reputation. Our findings provide new insights into the real effect of news dissemination.
The Governance Effect of the Media’s News Dissemination Role: Evidence from Insider Trading – Introduction
That the media plays a role in corporate governance is well known.1 What is less clear is how the governance effect of the media works. Existing evidence supports the notion that the media disciplines managers by creating content that exposes governance problems (Miller [2006], Dyck, Volchkova, and Zingales [2008]). We use evidence from a large sample of insider trading filings to investigate whether the media’s news dissemination role directly affects governance.
The SEC requires insiders to report their trading activities on Form 4 filings, which are typically disseminated through the media.2 This setting provides us with a useful opportunity to examine the effect of the media’s dissemination role on corporate governance, and specifically in restricting insiders’ trading profits. Since news dissemination increases the breadth of coverage and the attention of investors through repetition (Fang and Peress [2009], Bushee et al. [2010], Blankespoor, Miller, and White [2014], Peress [2014]), we conjecture that the media reduces the profitability of insiders’ future transactions by disseminating regulatory releases of prior insider trading activities. We call this view, which forms our main hypothesis, disciplining via dissemination.
Our main hypothesis is based on three mechanisms. First, by disseminating news on prior insider trades, insiders’ information advantage is reduced and prices adjust more quickly to the news (Bushee et al. [2010], Tetlock [2010]), directly reducing the profitability of future insiders’ trades. We refer to this attenuation effect of the media on insiders’ profits as the information asymmetry channel. Second, recent studies show that litigation can restrict and punish insiders’ opportunistic behavior, especially their selling activities (Cheng, Huang, and Li [2013], Billings and Cedergren [2014]). Therefore, because of concerns regarding litigation risk, insiders in firms in the media spotlight avoid opportunistic trading strategies and thereby earn reduced profits. We refer to this effect of news coverage as the litigation risk channel. Third, since the dissemination of insider trading news can adversely affect executives’ personal wealth and reputation (Dyck, Volchkova, and Zingales [2008]), we expect that the disciplining effect of news is more pronounced when executives have a greater amount of personal capital tied to firms. We refer to this mechanism as the capital-at-risk channel.
We examine our hypotheses using more than 1.375 million trades by U.S. corporate insiders from Thomson Reuters.3 Corporate news coverage data from RavenPack provide us with the number of Dow Jones news releases that are associated with the insiders’ firms. Following Jagolinzer, Larcker, and Taylor [2011], we compute insiders’ profits as the alpha earned during the 180-day window after an insider’s buy or sell transaction. We investigate whether insiders consistently earn future abnormal profits when they face news coverage on their prior trades. Our examination is similar to recent studies of corporate activities conditional on prior media coverage (e.g., Core, Guay, and Larcker [2008], Kuhnen and Niessen [2012] on executive compensation; Braggion and Giannetti [2013] on limited voting shares). Consistent with our disciplining via dissemination hypothesis, we find a negative association between insiders’ future trading profits and news coverage of regulatory releases of insiders’ prior trading activities.
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