Media Coverage and the Cost of Debt

Finance

Haoyu Gao, Junbo Wang, Yanchu Wang, Chunchi Wu, Xi Dong 

Published in Journal of Financial and Quantitative Analysis, March 2020 

In markets with information friction, the media has become an increasingly important information integrator, validator, and disseminator, due to its ability to integrate/package information from multiple sources and spread information broadly. In doing so, media play a critical role in broadening investor recognition and reducing information asymmetry. Media coverage can also influence a firm’s corporate governance, liquidity, and default risk premiums by exposing its governance problems, increasing its trading activity, and improving the information environment.  

Using a comprehensive dataset that includes a large number of corporate bonds issued over a long-time span, Professor Junbo Wang of the Department of Economics and Finance and his co-authors document extensive evidence that media coverage is negatively related to the cost of debt. Firms covered by the media have significantly lower offering yield spreads on bonds than those not covered. For their sample, the average offering yield spread for firms without media coverage is 249 basis points, while the average offering yield spread for similar firms but heavily covered by media is only 116 basis points.  

“This indicates that firms heavily covered by media save around 53.4% of borrowing costs,” says Wang. 

Numerically, if we assume two similar firms each issued one bond with the same issue size 600million US$ (the average bond issue size of their sample), the firms with more media coverage only need to pay 6.96 million per year as interest payment, while the firm without media coverage need pay 14.94 million per year as interest payment.  

In line with information demand theory, the relationship between media coverage and bond offering yields is stronger for firms with a smaller analyst following, lower institutional ownership, and affiliation with less reputable investment banks. Also, the impact of media coverage is much greater for small firms, young firms, and firms with high discretionary accruals. The empirical evidence reveals four important channels through which media coverage influences debt cost: information asymmetry, corporate governance, bond liquidity, and default risk.