Does Media Attention Lower Debt Financing? International Evidence

ABSTRACT

This article examines the association between media attention and debt financing through a number of channels associated with information asymmetry reduction and whether this relationship changes with cross-country institutional environment characteristics. Focusing on a comprehensive international dataset, we find that overall media coverage is negatively related to firm leverage levels. Media-focused variables directly associated with information asymmetry levels, including press-initiated news, non-financial news, and the extent of positive news sentiment, are also negatively related to firm leverage ratios. Furthermore, the country-level institutional environment provided a substituting rather than legitimizing influence on the relationship between media news coverage and firm financing decision-making.

KEYWORDS:

• Media attention
• firm leverage
• information asymmetry
• institutional environments

JEL CLASSIFICATION:

• G12
• G15
• G29
• G32

Acknowledgments

The authors wish to thank Paresh Kumar Narayan (Editor in Chief), and two anonymous referees for very helpful comments and suggestions. We also thank the participants at the 30^th Australasian Finance and Banking Conference (2017), and the 2018 Vietnam International Conference in Finance, the 2019 UEH International Conference on Business and Finance, and external seminar at La Trobe University (Australia), for very fruitful comments and suggestions.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. Being able to substitute equity for debt financing has many advantages, including greater flexibility, longer maturity, less restrictive impediments and firm size and status benefits.

2. The study of Fang and Peress (2009) indicates that the media is likely to disseminate information to a wider set of audiences. Similarly, Bushee et al. (2010) and Blankespoor, Miller, and White (2014) document that business news mitigates information asymmetry around earnings events through its information rebroadcasting channel. In a similar vein, prior studies find that media coverage can reduce cash flow mispricing predominantly by disseminating earnings information more broadly (Drake, Guest, and Twedt 2014) and can mitigate insiders’ future trading profits by broadcasting news on previous insider trading (Dai, Parwada, and Zhang 2015).

3. Kothari, Xu, and Short (2009) document that the media mitigates cash flow risk and information asymmetry, and thus improves firm transparency.

4. The sentiment scores provided in the Ravenpack database range between 0 to 100, with sentiment scores above (below) 50 representing positive (negative) sentiment. We classify individual news stories as having positive or negative sentiment based on these sentiment scores.

5. See Booth et al. (2001), Giannetti (2003), Djankov et al. (2008), and Fan, Titman, and Twite (2012) for reviews on the effect of institutional environment on capital structure.

6. Dyck and Zingales (2004) and Doidge, Karolyi, and Stulz (2007) document that the country-level institutional environment is a good substitute for firm-level corporate governance mechanisms.

7. For instance, Shroff, Verdi, and Yu (2014), Dai, Parwada, and Zhang (2015), and Dang, Moshirian, and Zhang (2015).

8. These variables will be explained in more detail in the Empirical Results section.

9. Also see the Appendix for variable definitions.

10. Lemmon, Roberts, and Zender (2008) indicate that time-invariant, unobservable firm-specific factors explain a high amount of variation in firm leverage.

11. The idea is that developed economies have stronger economic conditions, better institutional characteristics and more-transparent information quality relative to emerging markets, so one might expect that investigating the influences of the media on firm leverage in a cross-country setting can provide new insights to the literature.

12. The NEWSRPT variable significance levels (t-statistics) are also higher for the U.S.-based models relative to those for the non-U.S. regression estimations.

13. Interestingly, this can be contrasted to the result intimated in Gao et al. (2020) in their Table 5 suggesting no difference in book leverage ratios between U.S. firms with and without news coverage.

14. Financial news relates to any information that covers financial events across different levels, including global, country, industry, and firm levels. We use the Ravenpack news reporting information to identify financial news related to firm capital budgeting, financing, and earnings distributions decisions, and treat other news items as being non-financial in nature. Directly examining the contribution of non-financial news should also assist in resolving any endogeneity concerns, as this should clearly be exogenously-determined.

Additional information

Funding

This research is funded by Vietnam National Foundation for Science and Technology Development (NAFOSTED) under grant number 502.02-2018.10. Man Dang, Viet Anh Hoang, and Khoi Nguyen Tran are from University of Economics, the University of Danang, Vietnam. Darren Henry is from University of La Trobe, Australia. Xuan Vinh Vo is from University of Economics Ho Chi Minh City (Vietnam). All remaining errors are our own.