The Information Role of the Media in Earnings News

• Published date: 01 June 2021
• Author: NICHOLAS M. GUEST
• Date: 01 June 2021
• DOI: http://doi.org/10.1111/1475-679X.12349

DOI: 10.1111/1475-679X.12349

Journal of Accounting Research

Vol. 59 No. 3 June 2021

Printed in U.S.A.

The Information Role of the Media

in Earnings News

NICHOLAS M. GUEST∗

Received 11 December 2018; accepted 22 November 2020

Abstract

I reexamine whether media articles with substantive editorial content inform

the market’s reaction to firms’ earnings news. Using variation in earnings

announcement coverage because of restructuring at The Wall Street Journal

(WSJ), my analyses suggest that WSJ earnings articles improve price discovery

and increase trading volume at S&P 500 earnings announcements. Addition-

ally, textual analysis suggests media articles that differ more from the firm’s

earnings release increase trading volume, and that the differences speed up

∗Samuel Curtis Johnson Graduate School of Management, Cornell University

Accepted by Christian Leuz. This paper is based on my MIT Ph.D. dissertation. Earlier

versions circulated with the title “Do Journalists Help Investors Analyze Firms’ Earnings

News?” I am grateful for the guidance and support of my dissertation committee: John Core,

S.P. Kothari (cochair), Eric So (cochair), and Rodrigo Verdi. I thank an anonymous ref-

eree, Sanjeev Bhojraj, Jonathan Bonham, Steve Crawford, Mike Drake, Travis Dyer, Valere

Fourel, Lance Gabrielsen, Kurt Gee, Jacquelyn Gillette, Tim Gray, Daniel Green, Jenessa

Guest, Michelle Hanlon, Jinhwan Kim, Josh Lee, Maria Loumioti, Chris Noe, Suzie Noh,

Heidi Packard, Christopher Palmer, Anton Petukhov, Georg Rickmann, Ethan Rouen, Del-

phine Samuels, Nemit Shroff, Lorien Stice-Lawrence, Brady Twedt, Joe Weber, and Ben Yost,

as well as seminar participants at MIT, Rice, UNC-Chapel Hill, UCLA, UT-Austin, HBS,

Penn State, Cornell, Rochester, Yale, and the 2017 BYU Accounting Research Symposium

for helpful comments and suggestions. I also thank Max Frumes of Quant Media, Chris

Roush of Talking Biz News, and a WSJ reporter (who wishes to remain anonymous) for

helpful discussions about the business press industry. All errors are my own. I appreciate

the financial support of MIT, Cornell, and the Deloitte Foundation. The data that support

the findings of this study are publicly available from sources identified in the text. An on-

line appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/

journal-of-accounting-research/online-supplements.

1021

© 2021 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business

1022 n. m. guest

(slow down) price discovery when they corroborate (contradict) the tone of

the firm’s news. Such high difference articles are slightly longer, are more

readable and specific, include more references to the industry and economy,

repeat less “stale” news published in previous WSJ articles, and quote more

investor and expert sources. Overall, my paper contributes to research on the

role of the media in earnings news by providing evidence that journalists’ ed-

itorial content helps investors understand firms’ earnings, instead of simply

entertaining or increasing awareness.

JEL codes: G10, G11, G12, G14, G20, M40, M41

Keywords: business journalism; media; price discovery; volume; returns;

earnings

1. Introduction

A central question about the media’s role in capital markets is whether

media coverage influences investors’ reactions to firms’ disclosures, such

as earnings releases (see section 5 of Miller and Skinner [2015]). Multi-

ple studies provide evidence consistent with the media disseminating, but

not creating, information that influences the market’s earnings response

(Soltes [2010], Bushee et al. [2010], Drake, Guest and Twedt [2014]). Their

“information creation” inference is based on articles with substantive edito-

rial content having no apparent association with the earnings response.12

This finding is somewhat puzzling because editorial content appears to

have a significant impact in other financial settings, including identifying

fraud and monitoring executive pay (Miller [2006], Core, Guay and Lar-

cker [2008]). Moreover, intuition suggests that editorial content could in-

form readers’ trading decisions around earnings announcements in several

ways, such as by contextualizing or simplifying the firm’s disclosure.

Consistent with this intuition, but in contrast to the prior earnings an-

nouncement studies, this study provides evidence that the market does re-

spond to earnings-related editorial content. My methodology differs from

the prior studies along several key dimensions, which I introduce briefly

here and describe further below. First, I study The Wall Street Journal (WSJ)

earnings articles, which feature more editorial content than many other

earnings-related media. Second, I focus on highly visible S&P 500 firms

whose news attracts many readers and is widely disseminated. Thus, dis-

semination is likely not the main issue for these firms. Third, I exploit a

series of restructuring events at the WSJ that produced plausibly exoge-

nous variation in earnings coverage. Fourth, I measure the extent to which

1Throughout the paper, I use the terms “journalist” and “reporter” interchangeably to

refer to the author(s) of a media article and the editor(s) who review and revise the article

before publication. “Editorial content” refers to journalists’ efforts to synthesize preexisting

information from a variety of sources or to describe new facts, trends, and ideas.

2Specifically, table 3 of Bushee et al. [2010] and table 5 of Drake, Guest and Twedt[2014]

provide evidence that articles with editorial content do not influence earnings reactions.

role of the media in earnings news 1023

and specific ways in which each media article differs from the firm’s press

release to provide evidence that the media creates, not merely disseminates,

value-relevant earnings news.

Reporters’ earnings articles could disseminate (i.e., repeat without revi-

sion) firms’ and other market participants’ information more broadly, ag-

gregate or repackage publicly available information from multiple sources,

and/or contribute original insights. These activities could inform readers’

trading decisions through several channels, including (but not limited to)

identifying which announcements merit attention, gathering and synthe-

sizing diffuse information, corroborating or contradicting public informa-

tion, revealing others’ private information through exclusive quotes, sim-

plifying opaque earnings releases, noting industry- or economy-wide trends,

and emphasizing issues that firms (or perhaps analysts) lack incentives to

address. To illustrate, appendix A.1 contains excerpts from a WSJ article

about General Dynamics’ fiscal 2013 earnings release. This article high-

lights several potential implications of the earnings release by contrasting

perceived good news (share buyback) and bad news (lower profit and sales

forecasts), comparing the firm’s and competitors’ buyback programs, and

discussing the effect of government spending cuts on the firm’s industry.

However, articles may have little effect on investors’ earnings response.

Perhaps journalists lack sufficient training in finance and accounting to

provide new insights about technical disclosures. Or high-frequency and

other sophisticated traders may already impound earnings news into price

before journalists can digest the news and publish an article. Alternatively,

articles could even impede market reactions by, for example, inducing in-

vestors to focus on trivial or sensational ideas and ignore value-relevant in-

formation (Sloan [1996]). If any of these is true, then journalists’ earnings

articles might simply entertain investors (e.g., day traders) but not improve,

or even influence, their trading (Jensen [1979]). In other words, this en-

tertainment role could fully explain why the media produces in-depth earn-

ings coverage. Although my study does not rule out the entertainment role

playing some part, it suggests earnings-related editorial content also plays

an information role.

Two main factors help reconcile my results with Bushee et al. [2010] and

Drake, Guest and Twedt [2014]. First, the prior studies identify and sep-

arate news articles that include any editorial content. However, many of

these articles, such as those published by the Associated Press (AP) and

Dow Jones (DJ) Newswires, do little more than supplement the earnings

number with analyst forecasts and recent stock returns. My tests instead fo-

cus on WSJ articles, which are substantially longer and more in-depth on

average.3Second, the prior papers include small and medium-sized firms

in efforts to maximize variation in dissemination. However, the benefits to

3DJ Newswires and WSJ are both published by Dow Jones & Company, making them ideal

for comparison. Whereas the former are typically published within 30 minutes of a press re-

lease, the latter often have a deadline of an hour or more (according to Ellison [2010] and