WPC Research
Research by Min Kim and Roger White
Extra, extra:
Newspaper closures prompt extra effort from local businesses

“N

ewspaper readership is declining like crazy. There’s a good chance that nobody is reading my column,” quipped humor columnist Dave Barry. He had a point — U.S. newspaper circulation shrank from 60 million in 1994, the year Barry penned his lament, to 35 million in 2018, according to Pew researchers.

For those who recognize the watchdog role of journalism, this decline might look like a dangerous decrease in corporate oversight. That’s why Assistant Professor of Accounting Roger White teamed up with Min Kim, doctoral student of accountancy, to see if firms would become less transparent and less investor-friendly with local newspaper losses.

Local firms didn’t. White and Kim found that firms with at least 50% of their operations located near a defunct paper take extra steps to keep investors informed and rewarded.

Local heroes
“A lot of people believe that small, local newspapers don’t play an important role in the information environment in the United States,” White says, but previous research has shown that “more than half of unique news in this country is generated by small newspapers.” Large news venues comb these local resources, often via algorithm-driven software, and tease out the news that will be elevated to the national stage. As found by a University of North Carolina study that tallied 1,810 newspaper closures between 2004 and 2018, there’re fewer local resources for large news venues to explore.

“Facebook isn’t going away, The New York Times isn’t going away, but the foundation that their stories tend to originate from is going away.”
WPC Research
Extra, extra:
Newspaper closures prompt extra effort from local businesses

“N

ewspaper readership is declining like crazy. There’s a good chance that nobody is reading my column,” quipped humor columnist Dave Barry. He had a point — U.S. newspaper circulation shrank from 60 million in 1994, the year Barry penned his lament, to 35 million in 2018, according to Pew researchers.

For those who recognize the watchdog role of journalism, this decline might look like a dangerous decrease in corporate oversight. That’s why Assistant Professor of Accounting Roger White teamed up with Min Kim, doctoral student of accountancy, to see if firms would become less transparent and less investor-friendly with local newspaper losses.

Local firms didn’t. White and Kim found that firms with at least 50% of their operations located near a defunct paper take extra steps to keep investors informed and rewarded.

Local heroes
“A lot of people believe that small, local newspapers don’t play an important role in the information environment in the United States,” White says, but previous research has shown that “more than half of unique news in this country is generated by small newspapers.” Large news venues comb these local resources, often via algorithm-driven software, and tease out the news that will be elevated to the national stage. As found by a University of North Carolina study that tallied 1,810 newspaper closures between 2004 and 2018, there’re fewer local resources for large news venues to explore.

“Facebook isn’t going away, The New York Times isn’t going away, but the foundation that their stories tend to originate from is going away.”

“Newspapers serve as an important monitor for local firms,” Kim says. In a write-up of their study, he and White share memories from a former reporter who recalled when a newspaper in New London, Connecticut, broke the story that Pfizer was moving its headquarters and pulling 1,400 jobs out of town. An editor got the lead from a neighbor. “Maybe the neighbor came home with a bunch of cardboard boxes in the car one day,” White says. Neighborly banter could easily unveil such news.

Local newspapers can be especially valuable to investors, which may help explain why around 30% of the average equity owner’s portfolio consists of stocks from nearby companies, Kim notes. Mutual fund investors also are more likely to invest in hometown firms. “If a firm is covered by a local newspaper, it becomes more familiar,” Kim says. Local news also may give investors information nonlocal investors don’t have, which could provide a trading advantage.

Articles of faith
White and Kim looked at all firms in towns that suffered newspaper closures or large layoffs, but they found that only local businesses, not multinational firms like Microsoft, changed their investor-related activity. “When we say ‘local companies,’ we’re still talking about big firms with hundreds of millions in assets. We’re talking about companies that are traded on NASDAQ and the New York Stock Exchange, not Bob’s Hardware,” White says.

He continues: “The guy who owns Bob’s Hardware is Bob, but with public companies, the CEO and C-suite executives don’t own the whole firm — you and I do through our 401(k), mutual funds, and stocks. A big part of a CEO’s job is to convince investors that company managers are doing a good job and not wasting money on fruitless projects. One way CEOs increase public trust is to engage in a good-faith effort and ramp up dividends.”

By tracking the behavior of businesses in cities where newspaper closures occurred and comparing that behavior to similar firms in nearby cities, White and Kim discovered that newspaper closures were followed by more dividend payments and higher dividends. Specifically, local firms were one-tenth more likely to pay dividends, and they increased those dividend payments by one-tenth, as well.

Another thing firms can do for investors is to try to close the information gap left by a local newspaper’s demise. White and Kim found that local firms increased voluntary management disclosures by one-fourth once the local paper was no longer around. That is, when local newspapers shut down, firms increase things like press releases and performance forecasts.

Hard copy
White and Kim note that all signs point to continuing decay in the newspaper industry, and that’s bad news all over.

“Facebook isn’t going away, The New York Times isn’t going away, but the foundation that their stories tend to originate from is going away,” says White. “Even big companies — billion-dollar companies — are affected by the disappearance of these local papers.”

Ahead, White thinks companies will need more self-disclosure because they won’t be able to rely on a newspaper to publicize doings and attract potential investors. “They’re going to have to build up their investor relations and marketing departments to get their names and business models out in front of people,” he says.

“It looks like they’re going to have to pay out more dividends, too,” White adds. Maybe that’s why he and Kim used these words in the title of this recent research paper: “Stop the Presses! Or, Wait. We Might Need Them.” — Betsy Loeff