selective publicity and stock prices · • news: factiva –all news articles from january 2001 to...

David Solomon Selective Publicity and Stock Prices

Selective Publicity and Stock Prices

David SolomonUniversity of Southern California

Marshall School of Business

Columbia Business School

News and Finance: How the Media Affects Markets

March 11th, 2016

David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices

Introduction

• How do investors obtain and process information?

– Disclosure and market efficiency

– Limited attention/costly information processing

• Hong and Stein (1999), Hong, Lim and Stein (2000), Hirshleifer, Lim

and Teoh (2006), Kecskes and Womack (2007)

• How does the media affect information processing

and share prices?

• Does this create incentives for companies to

market or promote their news?

– Can firms affect what media coverage they receive?


Affecting Media Coverage

“I want you to call the Wall Street Chronicle,

extension 1605. You tell the man ‘Blue

Horseshoe loves Anacott Steel’. ”

Gordon Gekko, “Wall Street”


Media Coverage and IR Firms

• Different levels that could be influenced

– Do they write about the firm’s stories at all?

– If so, which stories do they cover?

– If so, what do they write in those stories?







• Dissemination: Lowers the cost of accessing

news about a company

– Investors read stories about a company that they

otherwise would not be able to access

– Merton (1987), Huberman and Regev (2001), Fang and

Peress (2009), Soltes (2008)







• Certification/Interpretation: Helps investors

process stories about a company

– Interpreting which facts are important or true

– Dyck and Zingales (2003), Tetlock (2007,2008)







• Quid pro quo? Direct Influence

– Interesting question, but seems less likely


Investor Relations Firms

• Investor Relations (IR) Firms

– External, Private Firms

– A subset of public relations, dealing with

communications with the market


Investor Relations Firms

• Investor Relations (IR) Firms

– External, Private Firms

– A subset of public relations, dealing with

communications with the market

• Coverage

– Used by 13% of US Publicly Listed Companies

– IR firm clients are on average larger, more visible

(market cap, analyst coverage, institutional ownership)

– Average cost of $470,000 per client


IR firm Summary Statistics

Rank Name IR Fees ($m) Total Fees ($m) Employees

1 Edelman PR Worldwide 32.92 230.43 1749

2 Ruder Finn 12.49 89.71 646

3 Integrated Corporate Rels. 8.01 8.49 31

4 Sloane & Co. 7.26 7.26 20

5 KCSA PR Worldwide 7.10 7.34 43

6 Ashton Partners 4.37 4.37 39

7 Intermarket Comms. 4.15 4.15 14

8 Peppercom 4.05 8.11 61

9 Dan Klores Comms. 3.48 17.39 148

10 Zeno Group 3.11 16.61 109

Largest IR Firms in 2005 by Fees

Year Mean Median Std Dev Min Max

2002 206 6.20 3 7.68 1 51

2003 208 5.88 3 7.38 1 50

2004 203 6.00 3 7.52 1 52

2005 201 5.45 3 6.63 1 44

2006 191 5.54 3 6.33 1 44

2007 188 6.31 4 7.42 1 52

Total 283

Number of Clients per IR FirmNumber of

IR Firms

Number of IR Firms and Clients by Year


Why Do Companies Hire IR Firms?



• Increase visibility, institutional ownership,

analyst coverage,

• Bushee and Miller (2007)




analyst coverage,


• Media Coverage

– Specialized links to media outlets?




analyst coverage,


• Media Coverage

– Specialized links to media outlets?

• “Marketing” for news

• Two Possible Roles: Spin vs. Attention


Spin

• Spin: IR firms mostly promote positive news

• Prediction: IR firms get companies more coverage

of good news relative to bad news

– Selective Publicity

• Prediction: Positive media coverage should push

up the share price

– Price increases around news that IR firm can spin, BUT

– Can’t increase returns forever. Price should revert at

some point.


Attention

• Attention: IR Firms aim to increase a company’s

overall visibility

• Prediction: IR firms should increase a company’s

overall media coverage

– No distinction between good and bad coverage

• Prediction: Increased visibility reduces the

company’s cost of capital Merton (1987), Fang and Peress (2009)

– When a company adds an IR firm, the price should

increase

– Returns thereafter should be lower


Data

• IR firm use : O’Dwyer’s Directory of Public

Relations Firms

– Annual observations from 2002-2007

– Includes client lists for PR firms

– Hand matched to CRSP companies

– Limited to PR Firms specializing in Investor Relations

• News: Factiva

– All news articles from January 2001 to December 2006

– Searches based on Factiva Intelligent Indexing

– US based firms with common shares, excluding

financials, utilities, and top 100 firms by total news

volume (download restrictions)


IR Firms and News Coverage

• Examine media coverage around news

announcements (press releases)

• Three Questions:

– Do IR Firms increase media coverage?

– Do they increase it more for the company’s good news?

– Does this ability to increase good vs. bad coverage change for

earnings announcements?



• Examine media coverage around news

announcements

• Three Questions:

– Do IR Firms increase media coverage?

– Do they increase it more for the company’s good news?

– Does this ability to increase good vs. bad coverage change for

earnings announcements?

• Good vs. Bad News – Press Release Tone

– Number of negative words in headline and lead paragraph

(Tetlock (2007), Loughran and McDonald (2011))


Effect of IR Firm use on News Coverage

Earnings

Announcements

Non-Earnings

Announcements

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

Positive/Neutral Negative Positive/Neutral Negative

% I

ncre

ase in N

ew

s C

overa

ge



IR Firm 0.271 *** 0.266 *** 0.276 ***

(6.39) (6.41) (6.79)

Neg. Tone 9.213 *** 8.537 *** 7.894 ***

(31.62) (29.37) (25.18)

IR Firm * Neg. Tone -2.449 *** -2.190 *** -1.594 **

(-3.75) (-3.71) (-2.46)

2.757 * 3.013 ** 2.474 **

(1.89) (2.28) (1.99)

Stock Characteristics Yes Yes Yes

Press Rel. Subject Codes No Yes Yes

Adj Return, MC*Tone No No Yes

R-Sq 0.355 0.374 0.391

N 274,416 274,416 273,713

Table II - IR Firm Use and Press Coverage Around News Announcements

Dep. Var. is Log (1 + Media Coverage on Day of Press Release Issuance and Day After)

Earnings Ann. * IR Firm *

Neg. Tone


IR Firm 0.271 *** 0.266 *** 0.276 ***

(6.39) (6.41) (6.79)

Neg. Tone 9.213 *** 8.537 *** 7.894 ***

(31.62) (29.37) (25.18)

IR Firm * Neg. Tone -2.449 *** -2.190 *** -1.594 **

(-3.75) (-3.71) (-2.46)

2.757 * 3.013 ** 2.474 **

(1.89) (2.28) (1.99)




R-Sq 0.355 0.374 0.391

N 274,416 274,416 273,713




Neg. Tone


IR firms associated with ~27% more media coverage


IR Firm 0.271 *** 0.266 *** 0.276 ***

(6.39) (6.41) (6.79)

Neg. Tone 9.213 *** 8.537 *** 7.894 ***

(31.62) (29.37) (25.18)

IR Firm * Neg. Tone -2.449 *** -2.190 *** -1.594 **

(-3.75) (-3.71) (-2.46)

2.757 * 3.013 ** 2.474 **

(1.89) (2.28) (1.99)




R-Sq 0.355 0.374 0.391

N 274,416 274,416 273,713




Neg. Tone


Bad news in general is more likely to generate coverage…


IR Firm 0.271 *** 0.266 *** 0.276 ***

(6.39) (6.41) (6.79)

Neg. Tone 9.213 *** 8.537 *** 7.894 ***

(31.62) (29.37) (25.18)

IR Firm * Neg. Tone -2.449 *** -2.190 *** -1.594 **

(-3.75) (-3.71) (-2.46)

2.757 * 3.013 ** 2.474 **

(1.89) (2.28) (1.99)




R-Sq 0.355 0.374 0.391

N 274,416 274,416 273,713




Neg. Tone


…but the effect of bad news is 20-27% smaller with an IR firm


IR Firm 0.271 *** 0.266 *** 0.276 ***

(6.39) (6.41) (6.79)

Neg. Tone 9.213 *** 8.537 *** 7.894 ***

(31.62) (29.37) (25.18)

IR Firm * Neg. Tone -2.449 *** -2.190 *** -1.594 **

(-3.75) (-3.71) (-2.46)

2.757 * 3.013 ** 2.474 **

(1.89) (2.28) (1.99)




R-Sq 0.355 0.374 0.391

N 274,416 274,416 273,713




Neg. Tone


“Spin” – getting more coverage of good news than bad news


IR Firm 0.271 *** 0.266 *** 0.276 ***

(6.39) (6.41) (6.79)

Neg. Tone 9.213 *** 8.537 *** 7.894 ***

(31.62) (29.37) (25.18)

IR Firm * Neg. Tone -2.449 *** -2.190 *** -1.594 **

(-3.75) (-3.71) (-2.46)

2.757 * 3.013 ** 2.474 **

(1.89) (2.28) (1.99)




R-Sq 0.355 0.374 0.391

N 274,416 274,416 273,713




Neg. Tone


However, no ability to spin earnings news


Why can’t you spin earnings?

• Why is earnings news hard to spin?

• Less opportunity for selective promotion

– Unscheduled press release : easier for journalists

to miss if not directly contacted

– Earnings is pre-scheduled days before, happens at

same time each year, large focus for the firm

• Hard information makes it difficult to BS people

– Straight comparison of analyst forecasts vs actual

earnings

– Soft information has more scope to downplay bad

news


Announcement Returns

• Does IR firm use affect returns around news

announcements?

• Examine the returns around earnings and non-

earnings announcements

– See whether IR firm clients have systematically

different stock returns


Effect of IR firms on Announcement Returns

Earnings

Announcements

Non-Earnings

Announcements

-0.4

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

3-D

ay C

hara

cte

ristic-A

dju

ste

d

Retu

rn



IR Firm 0.109 *** 0.112 *** -0.343 ** -0.336 **

(2.58) (2.94) (-2.46) (-2.35)

Earnings Surpsise (Pos) 1.667 *** 1.626 ***

(12.62) (12.77)

Earnings Surpsise (Neg) -1.173 *** -1.207 ***

(-11.89) (-12.08)

Stock Controls Yes Yes No Yes

Press Rel. Subject Codes No Yes No No

R-Sq 0.004 0.008 0.019 0.022

N 245,252 245,252 57,006 50,629

Table III - Press Release Returns and Investor Relations Firm Use

Dependent Variable is Characteristic-Adjusted Return (in %) from day t-1 to t+1

Non-Earnings Announcements Earnings Announcements



IR Firm 0.109 *** 0.112 *** -0.343 ** -0.336 **

(2.58) (2.94) (-2.46) (-2.35)


(12.62) (12.77)


(-11.89) (-12.08)



R-Sq 0.004 0.008 0.019 0.022

N 245,252 245,252 57,006 50,629




IR firms are associated with higher returns around non-earnings

press releases (by 0.11%), when they can spin the news…



IR Firm 0.109 *** 0.112 *** -0.343 ** -0.336 **

(2.58) (2.94) (-2.46) (-2.35)


(12.62) (12.77)


(-11.89) (-12.08)



R-Sq 0.004 0.008 0.019 0.022

N 245,252 245,252 57,006 50,629




…but lower returns around earnings announcements, by 0.34%,

when they can’t spin the news


Why negative returns?

• Why do IR firm clients get lower returns around

earnings?

– Earnings returns actually negative: investors in IR

firm clients are disappointed at an absolute level

• Can’t fool people forever.

– Higher expectations eventually get disappointed if

not backed up by higher earnings

• Low returns happens around hard information that

can’t be spun

– IR firm influence also lower – journalists more likely

to already know about earnings news


Are the returns due to IR firms themselves?

• Problem: IR firm use is correlated with lots of stuff

– Are the returns really driven by the IR firm

• Need a shock to the ability of the IR firm to

influence the media

• Strategy: Examine effects of turnover among

reporters connected to particular IR firms

– Connections: Reporter wrote about multiple IR firm clients

– Reporters leaving a newspaper should be fairly unrelated to

which companies they wrote about

– Connection is to IR firm, not to company itself

• Examine effects of having and losing connections


Example of Reporter Connection

Edelman PR

Google

Alcoa

Coca Cola

*Walter Winchell

*Joseph Pulitzer

Ernie Pyle

*Walter Winchell

H. L. Mencken

Ernie Pyle

Apple Ernie Pyle

*Joseph Pulitzer

. = Connected *= Left Paper



Edelman PR

Google

Alcoa

Coca Cola

*Walter Winchell

*Joseph Pulitzer

Ernie Pyle

*Walter Winchell

H. L. Mencken

Ernie Pyle

Apple Ernie Pyle

*Joseph Pulitzer

Connected

Turnover

0.5

0.5

0.5

0




Edelman PR

Google

Alcoa

Coca Cola

*Walter Winchell

*Joseph Pulitzer

Ernie Pyle

*Walter Winchell

H. L. Mencken

Ernie Pyle

Apple Ernie Pyle

*Joseph Pulitzer

Connected

Turnover

0.5

0.5

0.5

0

Company

Turnover

0.67

0.5

0

0.5



Announcement Returns and Reporter Turnover

-0.800

-0.600

-0.400

-0.200

0.000

0.200

0.400

No ReporterConnections

ReporterConnections

No ReporterConnections

ReporterConnections

3-D

ay C

ha

racte

ristic-A

dju

ste

d R

etu

rnEarnings

Announcements

Non-Earnings

Announcements


IR Firm 0.004 0.025 -0.184 -0.237

(0.08) (0.43) (-0.75) (-0.89)

0.228 *** 0.155 ** -0.514 * -0.498 *

(3.35) (2.17) (-1.77) (-1.68)

-0.821 * -0.774 * 3.913 *** 3.214 **

(-1.88) (-1.76) (2.60) (2.04)

0.066 0.209

(0.31) (0.56)

Controls

Stock Characteristics Yes Yes Yes Yes

Subject Code Dummies Yes Yes No No

R-Sq 0.008 0.007 0.022 0.020

N 245,252 230,044 50,629 41,455

Earnings Announcements


Table VI - Press Release Returns, Investor Relations Firm Use, and Reporter Turnover

Company Reporter

Turnover

Any Connected Reporters

(Dummy)

Connected Reporter

Turnover

Non-Earnings Announcements



IR Firm 0.004 0.025 -0.184 -0.237

(0.08) (0.43) (-0.75) (-0.89)

0.228 *** 0.155 ** -0.514 * -0.498 *

(3.35) (2.17) (-1.77) (-1.68)

-0.821 * -0.774 * 3.913 *** 3.214 **

(-1.88) (-1.76) (2.60) (2.04)

0.066 0.209

(0.31) (0.56)

Controls



R-Sq 0.008 0.007 0.022 0.020

N 245,252 230,044 50,629 41,455




Company Reporter

Turnover


(Dummy)

Connected Reporter

Turnover



Having connections makes IR effects larger…


IR Firm 0.004 0.025 -0.184 -0.237

(0.08) (0.43) (-0.75) (-0.89)

0.228 *** 0.155 ** -0.514 * -0.498 *

(3.35) (2.17) (-1.77) (-1.68)

-0.821 * -0.774 * 3.913 *** 3.214 **

(-1.88) (-1.76) (2.60) (2.04)

0.066 0.209

(0.31) (0.56)

Controls



R-Sq 0.008 0.007 0.022 0.020

N 245,252 230,044 50,629 41,455




Company Reporter

Turnover


(Dummy)

Connected Reporter

Turnover



But having connected reporters leave makes both effects smaller


IR Firm 0.004 0.025 -0.184 -0.237

(0.08) (0.43) (-0.75) (-0.89)

0.228 *** 0.155 ** -0.514 * -0.498 *

(3.35) (2.17) (-1.77) (-1.68)

-0.821 * -0.774 * 3.913 *** 3.214 **

(-1.88) (-1.76) (2.60) (2.04)

0.066 0.209

(0.31) (0.56)

Controls



R-Sq 0.008 0.007 0.022 0.020

N 245,252 230,044 50,629 41,455




Company Reporter

Turnover


(Dummy)

Connected Reporter

Turnover



Departure of non-connected reporters has no effect


Is the media coverage due to IR firms?

• Are IR firms actually causing the better media

coverage?

• Might just hire an IR firm because you have good

news coming up

• Strategy: Identify which news sources where IR

firms are likely to have more influence

– Newspapers in the same state as the IR firm

– Compare with the effect of company being in the same

state as the newspaper

– Do local connections provide more positive coverage?


News Coverage and Geographical Links

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

0.160

Base Coverage IR Firm in DifferentState

IR Firm in SameState

Company in SameState

Media Coverage of Positive Press Releases


IR firm 0.027 ** 0.026 ** 0.026 ** 0.026 **

(4.29) (4.25) (4.27) (4.29)

0.066 ** 0.058 ** 0.057 **

(3.43) (3.04) (3.06)

0.044 *** 0.044 ***

(8.04) (8.47)


State Controls No No No Yes

R-Sq 0.035 0.035 0.036 0.040

N

Dependant Variable is Coverage of Positive Press Releases as

% of All Articles in the News Source

IR Firm in Same State

as Paper

Company in Same

State as Paper

1,534,965 1,534,965 1,534,965 1,534,965

Table V - Media Coverage and IR Firm Geographical Links to Newspapers

Panel A - Positive Coverage as a Proportion of All Articles in the News Source



IR firm 0.027 ** 0.026 ** 0.026 ** 0.026 **

(4.29) (4.25) (4.27) (4.29)

0.066 ** 0.058 ** 0.057 **

(3.43) (3.04) (3.06)

0.044 *** 0.044 ***

(8.04) (8.47)



R-Sq 0.035 0.035 0.036 0.040

N




as Paper

Company in Same

State as Paper

1,534,965 1,534,965 1,534,965 1,534,965




IR firms get more coverage of positive press releases


IR firm 0.027 ** 0.026 ** 0.026 ** 0.026 **

(4.29) (4.25) (4.27) (4.29)

0.066 ** 0.058 ** 0.057 **

(3.43) (3.04) (3.06)

0.044 *** 0.044 ***

(8.04) (8.47)



R-Sq 0.035 0.035 0.036 0.040

N




as Paper

Company in Same

State as Paper

1,534,965 1,534,965 1,534,965 1,534,965




Effect of IR firms on positive coverage is around 3.2 times

higher for papers in the same state as the IR firm


IR firm 0.027 ** 0.026 ** 0.026 ** 0.026 **

(4.29) (4.25) (4.27) (4.29)

0.066 ** 0.058 ** 0.057 **

(3.43) (3.04) (3.06)

0.044 *** 0.044 ***

(8.04) (8.47)



R-Sq 0.035 0.035 0.036 0.040

N




as Paper

Company in Same

State as Paper

1,534,965 1,534,965 1,534,965 1,534,965




IR firm connection effect is around 30% bigger than the effect of

the company itself being in the same state as the paper


Relationship between IR firms and media

• So how do IR firms have influence?

– Personal connections matter

– Geography matters

• But IR firms can’t reduce coverage of bad news

– Less suggestive of conspiracy / quid pro quo

• Selective notification: only get in contact when news is good

– Might work if journalists are just busy

• Relatively hard to tell if story selection is slightly unbalanced

• Journalists actually write slightly more negative stories

about IR firm clients (because they know it’s being pushed)


Motivation for Using an IR Firm

• Why would firms pay to temporarily boost share

price?

• Manipulation of Investors?

– Similar to Earnings Management

• IR Firm use associated with

– Higher probability of earnings restatements

– Worse Governance

– Higher chance of cutting R&D

– Higher earnings accruals

– More stock and option compensation for CEO


Attention Hypothesis

• Could IR firm use be mostly about increasing

investor attention

– Overall media coverage increases when IR firm is added

• Standard explanation is a lower cost of capital

– More investors willing to put money in company

• Two predictions for returns

– Adding an IR firm should increase prices today

X Firms have lower returns in year they add an IR firm

– Subsequent returns should then be lower

X No difference in returns in years after adding IR firm


Conclusion

• Media coverage affects investor expectations of

future profitability

• Investors not distinguishing between media

coverage representing newsworthiness and

media coverage representing IR firm influence

• News Coverage involves a company-level choice,

similar to disclosure

• Reporters/Newspapers have more complicated

incentives than traditionally assumed

selective publicity and stock prices · • news: factiva –all news articles from january 2001 to...

Documents