Cross‐Country Variation in the Effectiveness of the Media's Corporate Governance Role: Decision to Abandon Value‐Destroying Acquisition Attempts

• Date: 01 June 2019
• Published date: 01 June 2019
• DOI: http://doi.org/10.1111/ajfs.12258
• Author: Jinhee Kim

Cross-Country Variation in the Effectiveness

of the Media’s Corporate Governance Role:

Decision to Abandon Value-Destroying

Acquisition Attempts

Jinhee Kim*

Darden School of Business, University of Virginia, United States

Received 31 July 2018; Accepted 10 February 2019

Abstract

I examine the cross-country variation in the effectiveness of the media’s corporate governance

role. I find this role to be more effective in countries with greater societal trust or concern

for shareholder wealth maximization. In those countries, news coverage of value-destroying

acquisition attempts leads to a higher likelihood of acquisition abandonment. By contrast,

the effectiveness of the media’s governance role does not vary directly with the status of local

media freedom. The results imply that a society’s shared values, such as trust or concern for

shareholder wealth maximization, play an important role in the media’s watchdog function.

Keywords Corporate Governance; Media; Mergers; Societal Culture; Trust

JEL Classification: G34, G41

1. Introduction

What makes, in a certain country, the local media acts as an effective corporate

watchdog? Recent finance literature has highlighted the media’s corporate gover-

nance role in aligning managers’ and shareholders’ interests.

1

By virtue of its role in

conveying information to the public, the media could contribute to increasing

shareholders’ accessibility to and awareness of information on corporate behavior.

2

Thus, the media could exert a governance role and there is ample empirical evi-

*Corresponding author: Darden School of Business, University of Virginia, 100 Darden Blvd,

Charlottesville, VA 22903, USA. Tel: +1-765-430-3121, email: kimji@darden.virginia.edu

1

For the purpose of this paper, “the media” refers to a single entity comprising a country’s

printed news.

2

The media’s role in diffusing information and its contribution to the efficiency of the stock

market is documented in Peress (2014). Tetlock (2010) presents a model and empirical evi-

dence that public news reduces asymmetrically held information in stock trading.

Asia-Pacific Journal of Financial Studies (2019) 48, 334–361 doi:10.1111/ajfs.12258

334 ©2019 Korean Securities Association

dence of its governance role in shaping corporate policies.

3

This burgeoning evi-

dence is usually based on US firms or coverage by international media such as The

Wall Street Journal and the Financial Times, rather than on local media.

However, not all media around the world exhibit an effective governance func-

tion as is seen with international media. Dyck et al. (2008) argue that the effective-

ness of the media’s governance role could depend on either the credibility of news

sources or the values shared by the society the media reaches. Motivated by Dyck

et al. (2008), this paper conducts a cross-country analysis of those circumstances in

which the media functions as an effective governance mechanism. Specifically, I

consider societal trust, concern for shareholder wealth maximization as a proxy for

the society’s shared values, and the status of local media freedom as a proxy for the

credibility of news sources.

To examine the effectiveness of the media’s governance function, I focus partic-

ularly on the decision of whether to complete or abandon proposed acquisition

attempts with negative stock returns at the announcement date. I select acquisition

attempts from among many other investment decisions because investing in another

firm would bring a material change to the current firm structure, and in turn

would influence shareholders’ wealth. Furthermore, I focus on acquisition attempts

accompanied by a negative market reaction at the announcement date because com-

pleting such a deal can represent a manager’s decision to destroy shareholder

wealth.

4

Altogether, I analyze the circumstances under which the given level of local

press coverage leads to a higher likelihood of withdrawing takeover attempts that

have negative stock announcement returns. In particular, I study the role of a soci-

ety’s shared values or the credibility of news outlets. As a proxy for the society’s

shared values, I use a greater societal trust indicator and a pro-shareholder indica-

tor. Both can affect the audience’s perception of given media information on corpo-

rate behavior. As a proxy for the credibility of news outlets, I use an indicator for

free local media. People could be more likely to consider news from free media as

their information source because the credibility of news information is likely to

increase with greater media freedom. Furthermore, all the analyses include year

fixed effects and acquirer- and target-country fixed effects. Thus, my findings are

robust to worldwide macroeconomic shocks and cross-country institutional di ffer-

ences.

3

For example, Dyck et al. (2008); Joe et al. (2009); Dyck et al. (2010); and Liu and McCon-

nell (2013).

4

Based on the sample used for the analysis of societal trust, the average abnormal returns of

withdrawn acquisition attempts at the announcement date are -2.05%. However, the average

abnormal returns of withdrawn acquisition attempts at the withdrawn date are 0.40%. That

is, investors react positively to the announcement of abandonment of value-reducing acquisi-

tion attempts.

The Media’s Corporate Governance Role

©2019 Korean Securities Association 335