When Mark DesJardine was working on his Ph.D., in 2015, he studied a few of the organizations that certify lumber harvested from responsibly managed forests. As he dug into the details, he noticed a troubling pattern.
The independent, not-for-profit certifiers had very rigorous standards and would only certify lumber with the cleanest pedigree. Meanwhile, the certifiers funded by the lumber industry had standards that were much more lenient. One certificate was informative and trustworthy. The other was a rubber stamp that didn’t mean much.
Ever since then, DesJardine, an associate professor at Tuck, has been more skeptical of the intermediaries of information. Questionable connections and hidden agendas abound. Jeff Bezos, the founder of Amazon, owns the Washington Post. Elon Musk owns X (formerly Twitter). Hedge funds have been on a media-firm buying spree in the past 10 years. Credit ratings agencies have been charged by the SEC for violating conflict of interest rules designed to prevent sales and marketing considerations from influencing their ratings. Now more than ever, we need to question the provenance of our information, he says.
DesJardine’s skepticism has coalesced, most recently, in the following question: does the reporting in the media change, depending on who the shareholders of that media company are? He and coauthors Wei Shi of the University of Miami and Xin Cheng of Renmin University of China answer that question in a paper just published in Administrative Science Quarterly: “The New Invisible Hand: How Common Owners Use the Media as a Strategic Tool.” Their resounding—while unsettling—conclusion is yes.
The context for their paper is the modern stock market, where institutional investors such as BlackRock and Fidelity own roughly 80 percent of publicly traded equities. These institutional investors are also “common owners,” which means they own shares in at least two publicly traded firms—usually, they own substantial portions of dozens of companies, many of which are in the same industry.
In recent years, common owners have come under scrutiny for the power they wield. Through their large ownership stake in firms, they can engage managers on issues important to them, and they can also threaten to sell their stock if managers don’t comply with their requests, which can be costly to the firm. Common owners may even have a financial incentive to encourage firms to coordinate rather than compete. For this reason, policymakers have discussed regulating common owners to ensure they aren’t engaging in anti-competitive behavior.
In this environment, the authors assert, common owners may “seek to use more-indirect channels that allow them to maintain influence over the competitive dynamics of firms and industries to advance their economic interests—but to do so out of plain sight.” As institutional investors have now become the largest shareholders of most publicly traded news media companies, it’s logical to wonder if they use the media’s bullhorn as a tool to boost the reputation of other firms they invest in and/or to harm the reputation of firms that compete against firms they invest in.
The authors investigated this question by looking at linkages between common owners and the media coverage of their portfolio companies and companies outside their portfolio. Their sample period ranges from 2007 to 2019 and includes more than 4,000 firms and all the media outlets owned by the 15 publicly traded media companies in the U.S.
There are these forces in play that you don’t see, but we need to be aware of them. This convergence of ownership and information has created this new environment where we have to ask what’s going on behind the scenes.
— Mark DesJardine, Associate Professor of Business Administration;
Daniel Revers T’89 Faculty Fellow
How might these linkages play out in media coverage? Say, hypothetically, that BlackRock owns at least a 5 percent interest in the Comcast Corporation (CNBC and NBC); News Corporation (Marketwatch, the Wall Street Journal, Barrons, and the New York Post); the New York Times (Boston Globe and the New York Times) and Home Depot. The authors were observing whether there was a change in the way those media companies covered Lowe’s (Home Depot’s main competitor). When they reviewed the data and controlled for a host of factors, the authors had four main findings:
- A firm’s media coverage is more negative when its rivals’ institutional investors hold shares in the media providing the coverage.
- A firm’s media coverage is even more negative when the firm has higher product similarity and geographic overlap with the rival firms in the common owner’s portfolio.
- The coverage a firm receives is more negative when its rivals’ common owners of the media have longer investment horizons; and
- Media executives’ own economic incentives amplify the main relationship, such that the coverage a firm receives is more negative from commonly owned media outlets in which media CEOs receive higher stock-based compensation.
To learn more about the mechanism behind these relationships, the authors interviewed journalists, senior editors, and editors-in-chief at publicly owned media companies. They divulged that decisions about media coverage can be made at the highest level of the corporate hierarchy; institutional investors can gain influence by obtaining seats on the board and/or placing insiders directly in a media company in which they have ownership; and media executives exert influence by controlling the career mobility of journalists and editors. The authors sum up this situation as follows:
Having uncovered this invisible hand steering media coverage for or against publicly traded firms, the authors suggest a few practical implications. Most importantly, their study calls for more regulatory attention to the backroom conversations that happen between investors and executives. Currently, SEC laws govern the flow of information from executives to investors (i.e., insider trading), but there’s no control of information flowing the other way, even though it can have a substantial impact on managerial decision-making and competition. Until such regulation begins, however, the authors point out that managers would be wise to partner with institutional investors that could help them use media companies as a strategic asset.
Overall, DesJardine hopes the paper will raise awareness about the relationship between ownership and media coverage so society can design a better system—one where the public can trust that media coverage is as fair and unbiased as possible. DesJardine himself doesn’t claim to know the solution, so he hopes Tuck alumni and others in the business world will reach out to him with suggestions.
“There are these forces in play that you don’t see, but we need to be aware of them,” he says. “This convergence of ownership and information has created this new environment where we have to ask what’s going on behind the scenes.”
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