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E-MailAlberta Di Giuli is Professor of Finance at ESCP Business School, and Paul Laux is Professor of Finance at the University of Delaware Lerner College of Business and Economics. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.
Could the presence in a firm’s board of a member that concurrently sit in a media company influence the media coverage of that firm? And what are the consequences in terms of financing and ownership for the firm in question?
In our paper, The Effect of Media–Linked Directors on Financing and External Governance, forthcoming in the Journal of Financial Economics, we test the hypothesis that firms that share a board member with a media firm receive higher media coverage. The increased media coverage acts, or is perceived, as a “watch dog” or a source of external monitoring, and allows the firm to switch from high intense monitoring form of financing (e. g. bank loans) to less intense one (e. g. bonds).
Our hypothesis builds on recent findings (Bharath and Hertzel, 2019) that show that increased external governance has a significant negative impact on the use of bank financing over public debt issuance as it affects the demand for creditor governance: firms endogenously switch among different governance mechanisms to shape an optimal governance structure.
In our sample of U.S. public companies over 2002-2019 period we find that firms that share a board member with a media firm have a significantly higher media coverage than firms that don’t. We examine the implications of this increase media coverage on financing and we show that firms that share a board member with a media firm decrease the amount of new secured bank loans (7% of lagged assets) and in general bank debt (5% of lagged assets) and increase the amount of bond financing (5% of lagged assets).
Finally, we also examine the effect of media board members on equity ownership: media-linked directors are associated with a decrease in the proportion of shares held by blockholders.
Our results are robust to controls for firm-level heterogeneity and a number of tests to rule out alternative explanations and reverse causality: specifically, we implement an instrumental variable analysis, a granger causality one and a path analysis.
This complex pattern of results in different directions fits our reasoning about the governance importance of media-linked directors, and would be difficult to rationalize otherwise. The common thread is a shift away from the most monitoring-intense forms of debt and equity—away from bank loans toward bonds, and away from equity blockholders.
There could be actually two alternative explanations to the above mentioned findings: an increase in the visibility of the firm or an increase in the perceived monitoring of the company by external sources (the media). As we do not find any effect on equity issues (neither in terms of pricing nor amount issues) a form of financing deeply affected by stock visibility and we find a decrease in bank loans, a form of financing perceived as monitoring intensive, we interpret that the increased media coverage acts as perceived “watch dog” for the firm, thus allowing the company to switch to a less intensive form of financing, such as bonds. Public bond financing arguably contributes least to monitoring, in that bonds have free-rider problems in monitoring, incentives for trustees to be passive, and coordination difficulties if distress occurs.
Effects of media-linked directors could also be evident in pricing for some forms of financing. We find that bond yields at issue are lower for firms with media-linked directors. Equity issue announcement abnormal returns are little affected. These findings are consistent with governance effects but not with visibility effects.
Finally, we ask whether the effects we document are more due to skill in communicating with the media, or more due to the direct access to the media that may come from a position on a media board. It seems to be the latter, for directors’ past associations with media are not associated with financing outcomes.
A striking aspect of our results is to illuminate the intertwined nature of inside and outside governance: Changes in internal governance (i.e. at the board level) lead to changes in external governance forces (media coverage and consequently financing). Conclusions from partial analyses of narrow aspects of a firm’s governance may be misleading and more holistic considerations are needed.
The complete paper is available for download here.
