HBS Working Knowledge, a weblog from Harvard Business School, recently published an interesting interview with Gregory Miller, associate professor at HBS. Miller concludes that financial media may not be as clueless as many managers would like to believe.
Miller's findings include the sobering fact that the financial media uncover a large number of corporate financial frauds, even before the SEC finds them or they are disclosed by companies.
One of Miller's recommendations: "I spend a lot of time on relationships with the press, and I would say, 'Think about the fact that the press is going to be there whether you like it or not.' So you might as well develop a good relationship. That means don't try to spin things to them, don't try to use them; rather be honest with them."
A portion of the interview follows:
(Thanks to Poynteronline's Romenesko for the tip.)
Q: What did you find?
A: The first important finding in the paper is that the press uncovers accounting malfeasance and that they are a very early source. And that's something that I couldn't tell my students before and other researchers didn't know. In about 29 percent of the cases, the press is way out there before the SEC. And in some cases, people just ignore early warnings. Everybody says, "Where was the press?" It was just amazing to me to see how many times the press wrote, "We just don't get it, there's a problem here." But it just doesn't get picked up in the sea of all the other information that's out there.
When I presented early versions of this paper, people just couldn't believe that the press could actually do this.
The second set of questions was: How is the press actually doing this? Are they getting the information themselves? The press was actually generating the idea that there was an issue. That doesn't mean that they break into a company overnight and figure it out; but a lot of the evidence seems to show that they're out there talking with suppliers and people who work in this field, and they develop such knowledge of these companies that they start to get a sense of something that's not right and then they follow up. In over a third of these situations it appears that the press did the legwork, whether through private tips from somebody in the company, through suppliers or customers at trade shows saying something was weird, or through tracking the names of people who had been involved in fraud in the past and finding another company they're in.
The press's next most frequent source was analysts. As academics we've relied so heavily on analysts, but it's not clear that the analysts were actually uncovering fraud. In the twenty-some situations where an analyst was a source, only four or five identified a problem in writing in advance of the fraud.
Market tests showed that in the situations where it appears the press is the first source, there's a huge market response to the article: negative 10, negative 12 percent. These just dwarf most responses we see in research.
But where the press is repeating somebody else, the market effectively doesn't respond. And so to me the biggest thing in the paper is the fact that the press is actually providing new and original information. A lot of people didn't expect that. People in the press did. But most other people really are surprised to see that because they think of the press as repeaters and not as creators.
The third question—who gets covered—is really important because of the first two. If we say the press is important in uncovering these things, they uncover a third of them in advance, and they even create the original information in a large percentage of the situations, you start to say, wow, they really provide an important function in society, they are an important information intermediary. And when you talk to a lot of people in the press, they really push this: "We defend the common man," etc.
But there is real bias in whom they cover. They pursue big companies everybody cares about or small companies if they can tell the story in an interesting way. And of course the jackpot is if it's a big company about which they can tell the story in an interesting way.
It also is clear that they cover stories that are easier to identify. One of the variables that came through amazingly strongly is, the more people that were involved in a fraud, the more likely it was to end up in a press article early. The more people that are involved, the more people may be able to observe something funny going on as well. That shows when there's lower cost, the press is more likely to do this—which makes a lot of sense, but still is a good thing to know. It says the whistleblower laws we've been trying to support recently in Sarbanes-Oxley make a lot of sense.
Many people say the press might be conflicted by pressures from advertisers. We see conflict a lot with analysts so people were expecting a parallel in the literature. I found absolutely no support for it. And I beat that variable up because people believed that I should find support and I had to convince them there was nothing there. That doesn't mean there aren't individual outlets that are biased. What it means is that when we look at the press as a whole, because there are so many reporters and so many outlets, it does not appear that advertising money biases coverage—which I think was a cool result and different from the conflict we've seen with analysts, for instance.
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