The Economics of Sensationalism: The Lack of Effect of Scandal-Reporting on Business Outcomes

ABSTRACT

It goes nearly unchallenged that ambition for increased demand and therefore commercial forces induce newspapers to engage in sensationalism. However, who actually benefits, and to what extent, by reporting on alleged scandals remains largely unclear. Accordingly, this study evaluates the business outcomes of the most spectacular German scandal in recent decades. The results provide an explanation for an intentional lack of high-quality journalism; whereas news corporations, as well as advertisers, come away empty-handed, sensationalism seems to be incited by self-seeking journalists.

Notes

¹ Current theory (Hamilton, 2010) and empirical research (Gentzkow & Shapiro, 2010) argue that nonmonetary incentives for news corporation owners today are almost negligible. Although, of course, business practices do not always have to be motivated primarily by profit, we follow the literature and assume that economic logic largely determines newspaper content (“giving the audience what it wants”). Even if profit motives are not the primary focus, economic motives play an essential role to the extent that newspapers still at least must recover their expenses. This imperative requires them to follow an economic orientation (Alchian, 1950; Becker, 1962).

² Hamilton (2010) suggested that costs for producing an investigative story may reach $200,000 for a 3-day series comprising approximately 10 articles.

³ Arlt and Storz (2012) or Kepplinger (2014) highlighted the outstanding role of BILD within the Wulff scandal from the perspective of media and communication science. Moreover, infopaq analyzed 145,335 social media posts that made reference to the Wulff scandal in December 2011 and January 2012. Besides Christian Wulff, Angela Merkel, and Egon Geerkens, the person that was mentioned most frequently in those posts was Kai Diekmann, BILD’s editor in chief. BILD is Germany’s only nationwide tabloid, with a circulation of approximately 2.4 million (Sundays: 1.3 million). BILD is the largest newspaper in terms of circulation in Germany and has long been the leader in terms in circulation of all daily newspapers across Europe. Subscriptions account for less than 2% of sales (Sunday paper). Style, readership and outreach are most similar to the British Sun, the Austrian Kronen Zeitung, or the Swiss BLICK. In the United States, the New York Post may be the most comparable to BILD.

⁴ Taking the opposite perspective, Anderson (2004) showed that the market punishes overly flawed, or false, news coverage with dropping stock market prices.

⁵ Printed versions are paid per each, with fixed short-run revenues from advertisement; online content is mostly free, with advertising fees that are usually paid per 1,000 clicks.

⁶ We use the terminology of financial market analysis, describing the event-study methodology by means of stock prices. However, when applying the procedure to the analyses of circulation or online traffic, “returns” correspond to increases in circulation or online traffic, respectively.

⁷ Events after closing of the stock exchange, on weekends, or on holidays were assigned to the next trading day.

⁸ We excluded events that coincided with publications of financial reports by Springer and changes in the Corporation’s supervisory board, as those incidents confounded the analyses (time frame: +/-5 days around the events; see Table 1 for excluded events).

⁹ The HDAX includes the 110 largest assets of the German Prime Standard and covers 95% of market capital. The DAXsector media includes 12 German assets that operate in the media sector.

¹⁰ Axel Springer Corporation does not publish data on daily circulation. Hence, we used weekly data for the Sunday paper from the IVW, which corresponds to the AAM in the United States or the ABC in the United Kingdom.

¹¹ Only one event, the separation of the Wulff couple, showed significant effects that remain robust across both benchmark indices and test statistics (p < 0.1). Detailed results for single events can be obtained from the authors upon request. We controlled for thin trading bias. Yet, Springer Corporation’s shares are traded frequently; thus, thin trading is not a problem (Campbell & Wasley, 1993; Cowan & Sergeant, 1996).

¹² Detailed results for single editions can be obtained from the authors upon request.

¹³ Detailed results for single event months can be obtained from the authors upon request.

¹⁴ For example, with the exception of March 2011 (Fukushima), online traffic on Spiegel’s website reached an all-time high in February 2012 (Wulff’s resignation; p < 0.05). Similarly, a 2012 study on readers’ trust in newspapers revealed that although 81% generally trust news coverage offered by regional newspapers, by Frankfurter Allgemeine Zeitung (71%), Spiegel (70%), and Sueddeutsche Zeitung (68%), only 30% trust the reliability of BILD’s news (GPRA, 2012).

¹⁵ Because of longer time intervals for online traffic data, event-date clustering may be of special concern. Hence, we do not offer any statistics for multi-month windows, but instead employed regressions using event dummies (McChesney, 1987). Results remained insignificant.

¹⁶ Subgroups contained, for example, only the events of December 2011 to February 2012 (i.e., when the “scandal lifecycle” reached its peak, culminating in Wulff’s resignation), only those events that deal with official criminal proceedings, only those events that depict actions of Christian Wulff himself, or only those events that made it onto the titel page of BILD’s Sunday paper.

¹⁷ Yet, BILD has been publicly criticized for dramatizing stories and overhyping insignificant issues for decades, without ever feeling a need to change the reporting style (Mittelberg 1967; Spiegel Online 2007), which may indicate that attitudes of readers do not change much or do not matter much in terms of changing its economic prospects.