Media Bias in Financial Newspapers
One of my favorite papers of the year….“Thus, the media bias can also be explained by newspapers choosing the companies’ exposures according to their editorial policy. “
Abstract (Via SSRN)
The financial market was well developed in France in the years before World War I, and there were many newspapers that provided information to investors. Yet commentators at the time faulted the financial press for inaccuracy and biases, which they linked to the existence of payments made by companies for coverage in the editorial section. This paper tests whether the payment scheme induced a systematic bias in the coverage of companies listed on the Paris stock exchanges by newspapers. The results show that, although firms’ media coverage was affected, the performance of firms actually touted by the press was good. Thus, the media bias can also be explained by newspapers choosing the companies’ exposures according to their editorial policy.
Excerpts (Via SSRN)
This paper provided quantitative evidence on how four financial newspapers chose the information they published on listed firms in early-twentieth-century France. It shows that editors used varying financial criteria when choosing companies, thereby competing on various dimensions to attract readers. The results also show that the media were biased toward some subsets of companies but that this did not have a negative effect on their readers. Moreover, we have shown that independent newspapers were not the Holy Grail of unbiased information, because bank-owned newspapers did not underperform when compared to their independent counterparts. This stands in sharp contrast with the judgments of many observers writing at the time. The results also suggest that the newspaper market was segmented between risk-averse and risk-seeking investors and that the selection of the firms covered in the media varied according to the targeted readership. Notice that the increasing digitalisation of newspapers’ content will allow future research to broaden the sample of newspapers tested and consequently to assess the generic character of our results.
Although each conclusion is not surprising in itself, the broader picture that they suggest is that the importance of media bias was clearly overemphasized in the historical literature and that the dissemination of information on listed companies must have undoubtedly contributed to the development of the financial markets. The payments to newspapers could, however, have a negative impact, notably because of the transaction cost they imposed on listed firms. In particular, following the literature on corruption, small firms, those that were not able to afford paying the numerous intermediaries involved in the information market, certainly suffered from the peculiarities of the process through which information made its way into the newspapers. We let to future research the estimation of this possible impact of media bias on the overall stock market performance.