The Corporate Governance Role of the Media: Evidence from Russia
ALEXANDER DYCK, NATALYA VOLCHKOVA, and LUIGI ZINGALES∗
ABSTRACT
We study the effect of media coverage on corporate governance by focusing on Russia
in the period 1999 to 2002. We find that an investment fund’s lobbying increases coverage
of corporate governance violations in the Anglo-American press. We also find
that coverage in the Anglo-American press increases the probability that a corporate
governance violation is reversed. This effect is present even when we instrument
coverage with an exogenous determinant, the fund’s portfolio composition at the beginning
of the period. The fund’s strategy seems to work in part by impacting Russian
companies’ reputation abroad and in part by forcing regulators into action.
IN RECENT YEARS HEDGE FUNDS have emerged as among some of the most powerful
players in corporate governance worldwide. From the dismissal of Deutsche
Boerse’s CEO Seifert to McDonalds’ spin-off of major assets in an IPO, hedge
funds have played a crucial role. TheWall Street Journal labeled them the “new
leader” on the “list of bogeymen haunting the corporate boardroom.”1 Among
the many tactics hedge fund managers use, the most prominent is the tactic
of focusing public attention on an underperforming company and shaming the
CEO to either resign or change policy (Kahan and Rock (2006)).
It is hard to tell, however, whether such a public relations campaign is just a
smokescreen for more important maneuvers that take place behind the scenes
or is a crucial ingredient of their battle. Can hedge funds (or shareholders
in general) increase the level of coverage received by certain news/companies?
And if so, does this coverage have any effect on corporate governance outcomes?
These questions are hard to address using U.S. data. Because most hedge funds
trade in and out of companies very quickly, it is hard to disentangle whether
they are simply good at recognizing that the situation is ripe for change or
∗Alexander Dyck is from the University of Toronto. He thanks the Gamma Foundation, the Division
of Research, Harvard Business School, and the Rotman School of Management for financial
support. Natalya Volchkova is from the New Economic School and works with CEFIR. Luigi Zingales
is from the University of Chicago and works with NBER and CEPR. He thanks the Gamma
Foundation, the CRSP center, and the George Stigler Center at the University of Chicago for financial
support. We thank Beatriz Armendariz, Stefano della Vigna, Andrei Shleifer, Andrei Simonov,
Ekaterina Zhuravskaya, and seminar participants at Dartmouth, Harvard, Stockholm School of
Economics and the NBER for very useful comments.We thank Mehmet Beceren and Victor Xin for
their research assistance.
1 AlanMurray “Hedge Funds Are New Sheriffs of Boardroom,”Wall Street Journal, 14 December
2005, pg. A2.
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1094 The Journal of Finance
whether they are indeed an agent of change. Further, because hedge funds in
the United States (and in most of Europe) also have access to an array of options
to address bad corporate governance (from shareholder’s suits to calling an
extraordinary general meeting), it is hard to tell whether they succeed because
of public relations campaigns or because of the power of their legal rights.
In addition, the impact of media campaigns can be
reduced by countervailing
public relations efforts exerted by firms.
To overcome these problems we study shareholders’ ability to influence coverage
and the impact of this coverage on corporate governance by studying the
case of Russia over the 1999 to 2002 period. Russia presents a useful laboratory
setting for this analysis for several reasons. First, during the late 1990s, corporate
governance violations in Russia were very extreme, very common, and
very visible, providing an ample field of inquiry.
Second, over the 1999 to 2002 period, the standard mechanisms to address
these violations were either nonexistent or completely ineffective (e.g., courts
were easily corruptible in Russia), allowing us to identify whether media have
an independent effect on outcomes.http://www.51lunwen.org/CorporateGovernance/
Third, and most important, in Russia there exists an investment fund (the
Hermitage Fund) with extremely low turnover that consciously played a media
strategy after the 1998 Russian crisis. In the words of its chairman Bill Browder,
“Our basic approach is to thoroughly research and understand where the
corporate malfeasance is taking place and then go to great pains to simplify the
story so the average person can understand what is going on. We then share
the stories with the press. By doing so, we want to inflict real consequences—
business, reputational and financial” (Dyck (2002), p. 9). Since the Hermitage
Fund spends resources only when it has money at stake, we can use the Hermitage’s
portfolio composition as an instrument for news coverage.
Fourth, during our sample period, Russian managers were just learning
about the impact of the press and were unlikely to factor into their decisions
the reputational cost the media could impose.
Last but not least, in Russia there was a major regime shift at the time of the
Russian default, when the level of corporate governance violations exploded.
This regime shift makes it unlikely that the pre-default stake of Hermitage
(which we use as an instrument) was chosen with a media strategy in mind,
eliminating the risk of reverse causality.
Besides its role as an ideal laboratory setting, the study of alternative mechanisms
of corporate governance in an emerging market like Russia is of independent
interest. The fraction of pension money invested in emerging markets with
unformed legal systems (like China) is growing rapidly. But Western investors
often find themselves at a loss in these markets, where most of the U.S.-type of
institutional checks and balances do not work. Hence, our study of an effective
alternative corporate governance mechanism can be of great practical interest.
To identify a sample of potential corporate governance violations we exploit
the fact that a prominent Russian investment bank, Troika Dialog, produced a
weekly publication between 1998 and 2002 that highlighted all the corporate actions
that, in their view, had the potential to severely impact outside investors’
The Corporate Governance Role of the Media 1095
rights. This definition of potential violation does not necessarily imply that any
Russian law was infringed.2 Take, for instance, Tomskneft’s dilutive equity issue
in 1999. The issue was approved by shareholders present at the meeting.
But very few were able to be present because on the day of the meeting the company
ann
ounced that the venue had been transferred to a new distant location
that shareholders could not possibly reach in time to vote on the proposal.
We refine this list by eliminating repeated events and minor violations (like
a delay in financial reporting).We then study how much coverage each of these
violations received and whether they were stopped or somehow readdressed.
Not surprisingly, we find that the magnitude of the violation (which we proxy
by the potential loss caused by the announced decision) increases the extent to
which it is covered in the Anglo-American media.We also find that, controlling
for the severity of the violation, companies receiving more coverage in normal
periods (and thus that are more newsworthy) command more attention.
Even controlling for these factors, however, we find that the presence of the
Hermitage Fund among its shareholders increases the amount of coverage a
corporate governance violation receives. This correlation does not appear to be
due to the Hermitage Fund’s ability to pick newsworthy companies, since the
effect is present even when we use the Hermitage Fund’s stake in companies
at the beginning of the period (end of 1998).
Next, we test whether news coverage in the Russian and prominent English
language press surrounding and following the revelation of a potential violation
is correlated with the eventual outcome. We find that a bad corporate governance
decision is reverted following an increase in coverage of the event in
Anglo-American newspapers. More importantly, the probability of this reversal
is significantly affected by media coverage, even after controlling for other
potential determinants of the outcome, such as the degree of foreign ownership
and the involvement of international organizations such as the European Bank
of Reconstruction and Development (EBRD). By contrast, exposure in the local
press has no impact.
One explanation for the irrelevance of domestic newspapers is lack of credibility.
Another is that shaming only works if the audience shares the same
set of values. If diluting minority shareholders is not perceived as terrible by
Russian businessmen, then shaming cannot work. To separate these effects, we
use a Russian-language publication called Vedemosti. Since this publication is
a joint venture between theWall Street Journal and the Financial Times, it has
credibility similar to that of its owners. But being in Russian, it only reaches
Russian businessmen and politicians. Our finding that coverage by Vedemosti
has no significant effect suggests that in Russia the only shaming that works
is shaming that takes place in front of the international business community.
2 When discussing governance violations we focus on the distributional impact. It is harder to
make any overall welfare assessment. Even actions that have an extremely negative distributional
impact (such as pure theft) can have a positive efficiency effect, because the consolidation of cash
flow rights in one hand can have positive incentive effects as argued in the Russian case by Shleifer
(2005) and Guriev and Rachinsky (2005).
1096 The Journal of Finance
While exposure of corporate governance violations in the international press
seems to promote some redress, this evidence hardly proves that the press is
an instrument of change, let alone that hedge funds are the force beh
ind this
change. An egregious corporate governance violation is more likely to be covered
by newspapers regardless of any effort by hedge fund managers. And such
an egregious violation is also more likely to generate a reaction. To attempt to
disentangle these effects, we instrument foreign press coverage with the Hermitage
Fund’s stake in companies at the end of 1998. Since the Hermitage Fund
will only spend resources lobbying the press if it has some skin in the game,
Hermitage’s stake can be considered a good measure of the exogenous component
in news coverage. When we instrument coverage with this exogenous
determinant,http://www.51lunwen.org/CorporateGovernance/ its estimated impact on outcome does not change, suggesting this
link might be causal.
As with any instrument, the question remains whether it is truly exogenous.
To address this concern we gather additional evidence. The evidence consistently
points in the direction of causality flowing from news to outcome. In
particular, we are able to trace back the mechanism that allows the Hermitage
Fund to influence the publication of news.
Our estimate of the economic impact of media pressure is large. A onestandard
deviation increase in coverage increases the probability of reversal
by 14 percentage points (a 49% increase in the average sample probability),
and an additional article in the Anglo-American press buys a five percentage
point increase in the probability of reversal (or an 18% increase with respect
to the sample average). Since the average corporate governance violation had
the potential to dilute the value of equity by 57% and the average (median)
company had a book value of equity equal to $1,417 million ($114 million) by
the end of our sample period, then the value of an extra article published in
the Wall Street Journal or the Financial Times is $40.4 million ($3.3 million).3
If we restrict our attention to those firms with enough trading in their stock to
produce a reliable estimate of market value, our estimates are even larger since
the average (median) firm had equity value of $2,600 million ($288 million), and
the corresponding value of an additional article is $ 74.2 million ($8.2 million).
These results represent the impact that foreign media can have in Russia.
In countries like the United States where pro-shareholder values are widely
shared among the business community, the impact of media on corporate governance
outcomes is likely to be even stronger (and since firms are larger, its
value effect even bigger). Not surprisingly, therefore, publication of much milder
violations (such as the excessive compensation of the former NYSE chairman
Richard Grasso) has lead to immediate firings or resignations.
Our estimates also suggest that with limited resources the Hermitage Fund
was able to double the coverage of an event. This magnitude seems more specific
to a developing country like Russia. In more developed countries a fund
3 These data are based on the calculation 0.05∗ ∗ [0.57∗ ∗ book or market value of equity in dollars
in January 2002].We compute book value of equity based on the 80 companies that remain alive at
this date, and market values for 26 companies that remain alive in 2002 where there is sufficient
at liquidity in traded stock to compute a meaningful market value.
The Corporate Governance R
ole of the Media 1097
like Hermitage may find its impact reduced by countervailing lobbying efforts
exercised by the targeted companies. However, that the equilibrium effect is
reduced does not mean that the phenomenon is irrelevant in these countries:
Firms spend a lot of resources in public relations to diffuse this threat.
Finally, we investigate the main mechanism through which the press had an
effect.We find that in roughly half of the cases, media pressure leads a regulator
or a politician to intervene, while in the remaining half, it is the company
itself that relents, realizing the reputational costs of continuing the battle. In
sum, this evidence suggests that the primary mechanism through which media
coverage has an effect is by increasing the reputational cost of misbehavior
vis- ` a-vis a relevant audience (in this case Anglo-American investors).
This paper contributes to the literature on the real effects of media coverage.
Previous work looks at the impact of coverage on the voting behavior of citizens
(George and Waldfogel (2003) and Della Vigna and Kaplan (2007)) as well
as of representatives (Dyck, Moss, and Zingales (2005)). Similar to Dyck and
Zingales (2002, 2004), this paper looks at the impact of coverage on corporate
governance. However, rather than focusing on a cross-country correlation between
newspaper circulation and various corporate governance outcomes, this
paper focuses on a within-country setting where we are better able to identify
the impact of the press. In this respect, our paper is similar to Miller (2006) and
Dyck, Morse, and Zingales (2007), as both include an examination of the role
played by the media in bringing to light corporate fraud in the United States.
Our paper is also related to the growing literature on the determinants
of possible media biases. Previous work emphasizes the biases generated by
advertising pressure (Reuter and Zitzewitz (2006)), media ownership (Besley
and Pratt (2006)), competition for audience (Baron (2005), Mullinaithan and
Shleifer (2005), and Gentzkow and Shapiro (2006), and the quid-pro-quo between
journalists and sources (Dyck and Zingales (2004)). By contrast, this
paper looks at the ability of financial institutions, with sufficient “skin in the
game,” to influence whether a story makes its way to the international press.
Finally, our paper is also related to a large literature on shareholder activism.
As nicely summarized by Gillan and Starks (2003) and Karpoff (2001), the bulk
of this evidence has focused on pension and mutual funds and their attempt
to discipline managers with traditional control mechanisms, such as incentive
contracts (Almazan, Hartzell, and Starks (2005)). As in Kahan and Rock (2006),
we study a new important player (hedge funds), but we focus on the interaction
between this new player and an alternative mechanism: shaming in the press.
In addition, our use of Hermitage’s holdings as an instrument allows us to
make further progress towards establishing a causal link between activism
and outcomes. Note that a limitation of our study, due to the illiquidity of the
Russian market, is that we can only look at specific governance disputes rather
than overall share performance.
The rest of the paper proceeds as follows. In Section I we introduce a parsimonious
theoretical framework for considering the impact of the
media. We
start by arguing that the media can matter, as they impact the reputation of the
agents involved. In Section II we explain why we focus on the Russian market.
1098 The Journal of Finance
Section III describes our research design and data. Section IV studies the determinants
of media coverage of major corporate governance violations and the
impact that the Hermitage Fund has had on this coverage. Section V presents
our main results on the effect of media coverage on the probability that corporate
governance violations will be addressed. Section VI presents results when
we instrument for coverage with the presence of the Hermitage Fund. Section
VII discusses the mechanisms through which media affect outcomes. Section
VIII concludes.
I. What Role Can the Media Play in Corporate Governance?
A. The Role of the Media in Information Diffusion
The role of the media is to collect, select, certify, and repackage information.
In doing so they dramatically reduce the cost economic agents face to become
informed. When the Wall Street Journal reports a table with the quarterly
performance of mutual funds, for instance, an investor does not have to spend
time collecting all the pieces of information herself, but she can glance at them
in a second, for the price of a dollar (plus the opportunity cost of the time
spent reading). Furthermore, if there is a strong complementarity between
news and entertainment, as is often the case for hot or titillating topics, the
media can make the cost of absorbing information negative by packaging news
appropriately (Becker and Murphy (1993) and Dyck et al. (2005)).
This dramatic reduction (if not elimination) of the cost of collecting information
is very important since, in many situations, individual agents face a
rational ignorance (Downs (1957)) paradox: The cost of becoming informed exceeds
the benefit they can personally gain from that information. Hence, the
media have the power to overcome the “rational ignorance” result (Dyck et al.
(2005)). By doing so, the media increase the number of people who learn about
the behavior of other people, thereby increasing the effect of reputation. In the
words of Justice Brandeis: “Publicity is justly commended as a remedy for social
and industrial diseases. Sunlight is said to be the best of disinfectants; electric
light the most efficient policemen.”4
A.1. Which Reputation?
Starting with Fama (1980), the finance literature has recognized the importance
reputation plays in disciplining corporate managers. The early literature,
Fama (1980) and Fama and Jensen (1983), emphasizes managers’ reputation
vis- ` a-vis potential employers, who determine future jobs and wages. Even with
recent declines in CEO tenure, CEOs do not hop from job to job frequently.
Especially for CEOs of large companies, the probability of reentering the labor
market (and thus the importance of their reputation vis- ` a-vis future employers)
is minimal. By contrast, career concerns might lead directors to act against
4 Louis D. Brandeis, 1933, Other People’s Money, National Home Library Foundation, pg. 62.
The Corporate Governance Role of the Media 1099
the interest of shareholders. Since directors are appointed by managers, they
should care about their reputation vis- ` a-vis managers.
A more important consideration, however, is the role played by a mana
ger’s
(or a company’s) reputation vis- ` a-vis financial markets, as modeled by Diamond
(1989) and Gomes (2000). To the extent a company needs to access financial
markets repeatedly, its reputation will affect the terms of future financing.
Since these terms affect the profitability of a company and its ability to exploit
future investment opportunities, they will be important even for self-interested
managers.
Managers also seem to care not about their reputation vis- ` a-vis society at
large. As Dyck and Zingales (2002) argue, managers often bow to environmental
pressures not because such objections are in the interest of shareholders, but
because the managers do not want to face the private cost of being portrayed
as “a bad guy.”
B. The Role of the Media in Corporate Governance
Consider a manager who has to decide whether to make a decision that might
benefit her personally, but might hurt her reputation and trigger some legal
punishment. A simple application of Becker’s (1968) model suggests that a
manager will be dissuaded from such an action if and only if:
E(Private benefit) < E(Reputational cost) + E(Punishment)
= 
i
pi ∗RCi |i learns about it + π P, (1)
where RCi is the reputational cost of this action vis- ` a-vis group i, pi is the
probability group i will receive the news about the manager’s action and will
believe it , π is the probability of enforcement, and P is the punishment in case
of enforcement.
The media influence the right-hand side of this equation in four ways. First,
by publishing the news they can change pi, that is, the probability that a given
action is known to a certain audience and thttp://www.wlunwen.com/hus carries a reputational cost. Of
course, different media have different audiences, so each medium has a special
impact on its own audience’s pi. If, for instance, a company is planning to raise
new finance and it cares about the capital markets’ perception of its own action,
it will be very sensitive to coverage in outlets that are read by the financial
community.
The media can also affect the right-hand side of equation (1) by increasing the
reputational cost, RCi. One way they do so is by spinning the news. When the
business press chastised the lavish compensation of the former New York Stock
Exchange chairman Richard Grasso, many of the same directors who approved
the compensation changed their position and denounced it. What triggered
this change was not only the diffusion of this information to a large audience
(hence a change in pi), but also the negative characterization of Grasso’s pay
package. This negative slant increased the reputational cost the directors faced
1100 The Journal of Finance
and led to their about face. Another, related, way the press can change RCi is
by creating common knowledge. Many oligarchs probably do not condemn a
manager who dilutes outsiders, as long as she does it under the radar screen.
In fact, they might even congratulate her for her cleverness if she gets away
with it. When the dilution becomes public knowledge, however, and is criticized
by the international press, the very same oligarchs feel obligated to condemn
the violation as well (and shun the offender) to dissociate themselves from that
type of behavior.
The third way the media can impact the right-hand side of equation (1) is by
influencing the probability of enforc
ement, π.5 This impact arises through three
channels. The first one is a simple extension of Fama’s model to politicians: They
care about their future employers, that is, voters.6 The second channel relates
to the role of media in the battle between public interest and vested interests. A
major reason why vested interests have so much power in political decisions is
because of the “rational apathy” of voters (Downs (1957)). As Dyck et al. (2005)
argue, however, this rational apathy can be overturned by the media. By making
political news entertaining, the media can overcome voters’ cost to become
informed and, in so doing, reduce the power of vested interests. For instance,
Richard Grasso’s very large compensation became entertaining news and made
a much larger group of people aware of the potential conflict of interest intrinsic
to the position of the NYSE chairman, who is in part a defender of the
interests of the NYSE seat owners, and in part regulator. This new awareness
substantially weakened the position of the NYSE lobbying effort to maintain
its monopoly position. The third channel arises because politicians care not
only about their reputation vis- ` a-vis voters, but also about their reputation
(and their country’s reputation) vis- ` a-vis foreign countries. Russian President
Putin, for example, cares about his own reputation vis- ` a-vis the Western world
and, in particular, the United States. Any news (especially if reported in the
international press) that makes him appear weak or not in control of the situation
undermines his credibility in international circles. Therefore, he will be
more likely to take an action to address a problem if this problem is visible
to the international community. In sum, in the face of a corporate governance
violation, a regulator who has to decide whether to intervene faces a trade-off
very similar to equation (1). On the one hand, the private benefits of not enforcing
are represented by the effort saved and the gratitude acquired from the
company committing the violation. On the other hand, the regulator faces some
reputational cost for being perceived as ineffective in her own job. In addition,
she faces the risk of a punishment if her inaction violates a law and if this
5 The large literature on law and finance emphasizes the importance of legal enforcement as
different from the law on the books (LaPorta et al. (1998) and Bhattacharya and Daouk (2002)),
but has not explored what drives enforcement. As the discussion below suggests, media pressure
can be an important determinant of legal enforcement.
6 This is not strictly true with a regulatory agency such as the SEC where those in charge have
no voters to be accountable to. But it is a reasonable approximation, for the SEC relies for its budget
and authority on Congress, and these political overseers care about political concerns related to
inactivity.
The Corporate Governance Role of the Media 1101http://www.wlunwen.com/
law is enforced. By diffusing the news of a corporate governance violation, the
media expose the regulator’s lack of activity, increasing the personal cost of her
inaction. The SEC, for example, started to ask the NYSE board about its compensation
practices after the first news of Richard Grasso’s compensation was
published in the Wall Street Journal. The publication of that news informed
many people about the issue
and created some awareness that the SEC was
passive on this front. This awareness was sufficient to spur the Commission
into action.
Finally, the media can affect the right-hand side of equation (1) by impacting
the size of the penalty P. This is definitely true if a case goes to trial, because the
media can impact the mood of a jury, but it is also true whenever the enforcer
has any discretion in the size of the punishment and she is influenced by her
reputation vis- ` a-vis the public at large.
Note that all four of the terms on the right-hand side of equation (1) are
ex ante estimates. Hence, what will affect the decision to commit a corporate
governance violation is a manager’s expectation of the likelihood the relevant
players will learn about his decision and in such an event how harshly his decision
will be judged. After the decision has been made, however, what determineshttp://www.wlunwen.com/
the probability with which this decision is reversed is the actual realization of
those costs, which is greatly affected by the coverage in the media. Hence, the
impact of the media is most visible (albeit not necessarily most important) in
environments where managers underestimate ex ante the degree of intervention
and influence of the media. As we explain momentarily, this was exactly
the case in Russia.
C. When Are the Media Most Effective?
If we look at equation (1), media impact is greater when the media reach
a larger number of relevant groups (i.e., groups with whom managers care to
maintain a good reputation) and when the news reporting generates a greater
increase in pi. In the language of the media, these two characteristics are diffusion
and credibility, respectively. Ceteris paribus, the more people a medium
reaches, the broader will be the reputational impact of its reports. Further, to
produce an increase in pi, the news must come from a credible source, otherwise
it will not be believed. If we receive an e-mail coming from an unknown
organization that accuses a famous professor of plagiarism, we are unlikely to
believe it. If the same news were reported in the New York Times, we would
be much more likely to believe it because the New York Times has developed a
good reputation (some recent incidents notwithstanding).http://www.wlunwen.com/
The effectiveness of the media also depends upon several characteristics of
the surrounding environment. First, as discussed in Dyck and Zingales (2002),
shaming works when society at large shares the same set of values. French
newspapers did not try to shame former President Mitterand for his longlasting
extramarital affair because most French are willing to condone such
behavior. However, as former president Clinton experienced first-hand, this is
very different from the shared norm in the United States. When it comes to
1102 The Journal of Finance
corporate governance, shaming might reduce corporate governance violations
if most people believe there is a social benefit to protect shareholders. This is
definitely the case in the United States and among the readers of the Wall
Street Journal and the Financial Times, but it cannot be said for the average
reader in Russia.
Second, the magnitude of the penalty that can be inflicted on a violator depends
upon the frequency and the importance of business interactions. If a firm