Local newspaper coverage improves information about public companies

Newswise — Researchers at the University of Arkansas in the field of accounting are furthering their comprehension of the impact that reduced newsrooms have on the financial data of publicly traded firms.

An upcoming publication in the Review of Accounting Studies unveils a fresh study revealing that the presence of local newspaper coverage substantially enhanced the overall understanding of public companies. This improvement was measured through decreased stock volatility and more precise forecasts made by financial analysts. Conversely, the researchers discovered that a decline in local newspaper coverage led to heightened stock volatility, increased information asymmetry, and greater illiquidity.

Information asymmetry is an indication of stock stability, representing the disparity or divergence in knowledge between two parties regarding pertinent factors and specifics about the value of companies. Illiquidity, on the other hand, denotes a condition where a security or asset cannot be readily converted into cash or sold without difficulty.

Caleb Rawson, an assistant professor of accounting at the Sam M. Walton College of Business, highlighted that employment within the newspaper industry has declined by over 75% since 2000. He emphasized that researchers from various disciplines have already demonstrated the adverse consequences of this decline on local government, particularly in terms of transparency and accountability of elected officials. Rawson further noted that similar findings apply to businesses and public companies, indicating that the reduction in local newsroom employment has had a detrimental impact on the information landscape surrounding local firms.

Utilizing data obtained from the Bureau of Labor Statistics, Caleb Rawson, along with his co-authors Kris Allee, a professor of accounting at the University of Arkansas, and Ryan Cating, an assistant professor of accounting at the University of Central Arkansas and a doctoral alumnus in accounting from the University of Arkansas, assessed the degree of local news presence in each city (specifically, each metropolitan statistical area or MSA). This measurement was determined by calculating the percentage of local jobs within the newspaper publishing industry. The researchers then compared this data with essential indicators pertaining to firms' financial information.

The researchers observed that the impact mentioned earlier, wherein decreased news intensity resulted in reduced or lower-quality information, was amplified when a particular firm held greater significance within the local economy. In such cases, diminished local newspaper intensity correlated with a notable decrease in analyst accuracy and a decrease in the number of forecasts or an increase in their dispersion.

Rawson and his colleagues additionally delved into the response of stakeholders to declines in local news coverage of firms. They discovered that firm managers responded by increasing the number of forward-looking financial disclosures, while analysts expanded their coverage of the affected firms. Furthermore, in the aftermath of reductions in newspaper employment, investors heightened their own efforts in gathering data related to the firms in question.

Rawson expressed the belief that these findings offer valuable insights into the strategies employed by stakeholders to enhance the information environments of firms when local news coverage diminishes. He emphasized the crucial role that local newspapers play in the economy, underlining the significance of their presence and impact.

 Allee is the Doyle Z. Williams Chair of the Walton College’s Department of Accounting.