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?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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”
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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)
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
• Certification/Interpretation: Helps investors
process stories about a company
– Interpreting which facts are important or true
– Dyck and Zingales (2003), Tetlock (2007,2008)
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
• Quid pro quo? Direct Influence
– Interesting question, but seems less likely
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
Investor Relations Firms
• Investor Relations (IR) Firms
– External, Private Firms
– A subset of public relations, dealing with
communications with the market
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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 $470,000 per client
David Solomon Selective Publicity and Stock Prices
IR firm Summary Statistics
Rank Name IR Fees ($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
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
Why Do Companies Hire IR Firms?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
Why Do Companies Hire IR Firms?
• Increase visibility, institutional ownership,
analyst coverage,
• Bushee and Miller (2007)
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
Why Do Companies Hire IR Firms?
• Increase visibility, institutional ownership,
analyst coverage,
• Bushee and Miller (2007)
• Media Coverage
– Specialized links to media outlets?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
Why Do Companies Hire IR Firms?
• Increase visibility, institutional ownership,
analyst coverage,
• Bushee and Miller (2007)
• Media Coverage
– Specialized links to media outlets?
• “Marketing” for news
• Two Possible Roles: Spin vs. Attention
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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.
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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)
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
IR Firms and News Coverage
• 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))
David Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock Prices
IR Firms and News 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)
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
David Solomon Selective Publicity and Stock Prices
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 Firms and News Coverage
IR firms associated with ~27% more media coverage
David Solomon Selective Publicity and Stock Prices
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 Firms and News Coverage
Bad news in general is more likely to generate coverage…
David Solomon Selective Publicity and Stock Prices
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 Firms and News Coverage
…but the effect of bad news is 20-27% smaller with an IR firm
David Solomon Selective Publicity and Stock Prices
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 Firms and News Coverage
“Spin” – getting more coverage of good news than bad news
David Solomon Selective Publicity and Stock Prices
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 Firms and News Coverage
However, no ability to spin earnings news
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock Prices
Announcement Returns
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
David Solomon Selective Publicity and Stock Prices
Announcement Returns
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 firms are associated with higher returns around non-earnings
press releases (by 0.11%), when they can spin the news…
David Solomon Selective Publicity and Stock Prices
Announcement Returns
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
…but lower returns around earnings announcements, by 0.34%,
when they can’t spin the news
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock Prices
Example of Reporter Connection
Edelman PR
Alcoa
Coca Cola
*Walter Winchell
*Joseph Pulitzer
Ernie Pyle
*Walter Winchell
H. L. Mencken
Ernie Pyle
Apple Ernie Pyle
*Joseph Pulitzer
. = Connected *= Left Paper
David Solomon Selective Publicity and Stock Prices
Example of Reporter Connection
Edelman PR
Alcoa
Coca Cola
*Walter Winchell
*Joseph Pulitzer
Ernie Pyle
*Walter Winchell
H. L. Mencken
Ernie Pyle
Apple Ernie Pyle
*Joseph Pulitzer
. = Connected *= Left Paper
David Solomon Selective Publicity and Stock Prices
Example of Reporter Connection
Edelman PR
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
. = Connected *= Left Paper
David Solomon Selective Publicity and Stock Prices
Example of Reporter Connection
Edelman PR
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
. = Connected *= Left Paper
David Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock Prices
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
Dependent Variable is Characteristic-Adjusted Return (in %) from day t-1 to t+1
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
Announcement Returns and Reporter Turnover
David Solomon Selective Publicity and Stock Prices
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
Dependent Variable is Characteristic-Adjusted Return (in %) from day t-1 to t+1
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
Announcement Returns and Reporter Turnover
Having connections makes IR effects larger…
David Solomon Selective Publicity and Stock Prices
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
Dependent Variable is Characteristic-Adjusted Return (in %) from day t-1 to t+1
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
Announcement Returns and Reporter Turnover
But having connected reporters leave makes both effects smaller
David Solomon Selective Publicity and Stock Prices
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
Dependent Variable is Characteristic-Adjusted Return (in %) from day t-1 to t+1
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
Announcement Returns and Reporter Turnover
Departure of non-connected reporters has no effect
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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?
David Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock Prices
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)
Stock Characteristics Yes Yes Yes Yes
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
News Coverage and Geographical Links
David Solomon Selective Publicity and Stock Prices
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)
Stock Characteristics Yes Yes Yes Yes
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
News Coverage and Geographical Links
IR firms get more coverage of positive press releases
David Solomon Selective Publicity and Stock Prices
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)
Stock Characteristics Yes Yes Yes Yes
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
News Coverage and Geographical Links
Effect of IR firms on positive coverage is around 3.2 times
higher for papers in the same state as the IR firm
David Solomon Selective Publicity and Stock Prices
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)
Stock Characteristics Yes Yes Yes Yes
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
News Coverage and Geographical Links
IR firm connection effect is around 30% bigger than the effect of
the company itself being in the same state as the paper
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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)
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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
David Solomon Selective Publicity and Stock PricesDavid Solomon Selective Publicity and Stock Prices
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