Can Media Coverage Serve as a Governance Mechanism that Complements Lender Monitoring?

February 19, 2024

Weiling Song headshot

                  Weiling Song

The financial system constitutes a nexus of governance devices that serve to facilitate the flow of funds to firms seeking external financing while protecting investors’ interests. Among these governance mechanisms, media coverage has received increasing academic interest in understanding its role in the financial markets, primarily in the the equity markets.

In a forthcoming paper accepted by the Journal of Accounting and Public Policy titled “Media Coverage and Debt Financing,” Department of Finance Professor Wei-Ling Song and co-authors explored the multifaceted roles of media in the debt markets and investigated to what extent media coverage serves as a governance component in the financial system.

Purpose of the Study:

Past studies have shown media coverage can substitute bank governance. By increasing information availability and by keeping an eye on the firms, firms with more media coverage gain better access to raise money in the bond market and rely less on banks, which are important information producers and monitors in the financial system. However, it is unclear whether the effect of improved public bond access is through the information channel or the monitoring channel. Therefore, the authors utilize negative news to rule out the information channel and focus on the monitoring channel because negative information contents should reduce the level of debt financing regardless of type, and the increased availability of information should reduce the reliance on private lenders, such as traditional banks and privately placed debt holders.

In contrast to the potential effects of the information channel, the governance channel yields a clear prediction that, if the media is complementing the monitoring of private lenders, firms experiencing more negative news coverage should increase their reliance on private lenders. This is because firms facing negative news are perceived as riskier, requiring more extensive monitoring. In response to this increased risk, the authors propose that multiple governance mechanisms need to work together to mitigate the negative attributes associated with such firms, particularly those seeking external debt financing.

Research Outcomes:

Through meticulous analysis, the researchers uncovered several key findings. Firstly, they discovered that when firms encounter negative earnings news, they are less likely to turn to traditional sources of financing like bank loans and public bonds. Instead, they are more inclined to seek privately placed debt. Despite the negative nature of the news, media coverage actually complements private debt governance, offering a unique form of monitoring for riskier firms.

“ We find that negative earnings news significantly reduces the probabilities of bank loan and public bond usage but increases the likelihood of privately placed debt. These results are consistent with our hypothesis that media coverage complements private debt governance despite the negative information content disseminated by the media,” said Song. ”

Moreover, the study revealed that media sentiment predict future credit ratings and firm values. While both credit rating changes and media sentiment impact debt pricing and terms, only media sentiment influences the choice of debt instrument. This suggests that media coverage fills a vital gap left by traditional credit rating agencies.

Takeaways for Businesses:

For businesses, these findings hold significant implications. They show how different governance components of financial systems work together, facilitating risky firms’ access to outside financing. Understanding the interplay between different governance mechanisms can inform policymakers aiming to enhance the resilience of the financial system, particularly in the realm of non-bank lending. The study suggests that media monitoring serves as a crucial complement to private debt governance, especially when non-bank institutions lend to struggling firms. Without this alternative lending channel, the risk of firm failures would increase, potentially harming the overall economy.

In essence, the study underscores the importance of considering the broader ecosystem of governance mechanisms, including the media, in navigating the complexities of the financial landscape. By recognizing the complementary roles played by various actors, businesses and policymakers can work towards building a more robust and resilient financial system.

Read the full study:


About the Journal of Accounting and Public Policy:

The Journal of Accounting and Public Policy publishes research papers focusing on the intersection between accounting and public policy. Preference is given to papers illuminating through theoretical or empirical analysis, the effects of accounting on public policy and vice-versa. Subjects treated in this journal include the interface of accounting with economics, political science, sociology, or law. The Journal includes a section entitled Accounting Letters. This section publishes short research articles that should not exceed approximately 3,000 words. The objective of this section is to facilitate the rapid dissemination of important accounting research. Accordingly, articles submitted to this section will be reviewed within fours weeks of receipt, revisions will be limited to one, and publication will occur within four months of acceptance.

About the Department of Finance

The Department of Finance offers high-quality curricula to undergraduate and graduate students interested in careers in corporate finance, asset management, real estate, insurance, banking, financial planning, and business law. The department boasts internationally renowned research faculty in several areas, including derivatives, asset management, banking, and spatial econometrics. The department’s Securities Markets Analysis Research & Trading Lab utilizes the Bloomberg Professional service, the platform used by more than 300,000 leading business and financial professionals worldwide to make informed business decisions, and an extensive library of financial databases including the Wharton WRDS System. Additionally, the department encourages, supports, and conducts research in real estate by housing the nationally renowned Real Estate Research Institute. For more information, visit or call 225-578-6291.


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