Corporate social responsibility and media coverage

Corporate social responsibility and media coverage
Steven F. Cahan a,⇑
, Chen Chen b,1
, Li Chen a,2
, Nhut H. Nguyen c,3
aUniversity of Auckland Business School, Private Bag 92019, Auckland 1142, New Zealand
b Monash University Business School, 900 Dandenong Road, Caulfield East 3145, VIC, Australia
c School of Economics and Finance, Massey University, Private Bag 102 904, Auckland 0745, New Zealand
article info
Article history:
Received 27 January 2015
Accepted 7 July 2015
Available online 20 July 2015
JEL classification:
G10
L82
M14
Keywords:
Media management
Corporate social responsibility
Business press
abstract
In this study, we examine whether firms that act more socially responsible receive more favorable media
coverage, and we consider whether firms use CSR to actively manage their media image. We focus on all
news stories about a firm, not just those that report on specific CSR initiatives, and find that more socially
responsible firms receive more favorable news reportage overall, i.e., they have a more positive media
image. These findings are robust after controlling for potential endogeneity. Further, consistent with
firms actively managing their media image, we find a stronger relation between CSR and media favorability when incentives to improve a firm’s media image are high, e.g., among firms in sin industries, during periods of low investor sentiment, and prior to seasoned equity offerings. Finally, we find that for
firms that demonstrate superior social responsibility and receive more favorable news reporting, there
is a significant interaction between social responsibility and media favorability that increases (decreases)
a firm’s equity valuation (cost of capital). Our results are consistent with the media slanting their reporting in favor of good performing CSR firms. Overall, we contribute to the literature by showing that firms
can influence their media coverage through a relatively subtle channel, CSR performance.
2015 Elsevier B.V. All rights reserved.
1. Introduction
It is well documented that the business press plays an important role as an information intermediary and that media coverage
affects a firm’s information environment (e.g., Tetlock et al., 2008;
Fang and Peress, 2009; Engelberg and Parsons, 2011; Griffin et al.,
2011; Dougal et al., 2012; Kim et al., 2014a). Such studies assume
that media coverage is exogenous. In contrast, as Ahern and
Sosyura (2014) suggest, causality could run in the opposite direction, i.e., firms may take actions to influence the media coverage
they receive. Consistent with this notion, Gurun and Butler
(2012) find that the media respond to pressure from local advertisers. Solomon (2012) finds that media coverage is more favorable
for firms that use an investor relations firm. Ahern and Sosyura
(2014) find that firms with fixed stock exchange ratios issue fewer
negative press releases during the period when the exchange ratio
is set. We extend this limited line of research and examine whether
firms can manage their media coverage through a more subtle
channel, i.e., by performing better in terms of corporate social
responsibility (CSR).
We focus on CSR for practical and theoretical reasons. First,
investors and managers are increasingly concerned about CSR performance. For example, over 1250 institutional investors worldwide have agreed to support the United Nation’s ‘Principles of
Responsible Investment’ (PRI) project that encourages responsible
investing by institutional investors based on factors including
environmental and social performance (PRI Annual Report 2014),
and in 2010, $3.07 trillion were invested in professionally managed
US assets that ascribed to socially responsible investing
http://dx.doi.org/10.1016/j.jbankfin.2015.07.004
0378-4266/ 2015 Elsevier B.V. All rights reserved.
We thank Henk Berkman, Gary Biddle, Charl de Villiers, Fei Du, Torsten Jochem,
Charlene Lee, John Lee, Donghui Li, Dimitri Margaritas, Michaela Rankin, Irene
Tutticci, Anne Wyatt, Rencheng Wang, Xin Wang, Joyce Yu, Ying Zheng, and seminar
participants at the University of Auckland, University of Hong Kong, University of
Otago, University of Queensland, University of Technology, Sydney, Sun Yat-Sen
University, 2014 AFAANZ Conference, 2014 AAA Annual Meeting, 2015 Financial
Markets and Corporate Governance Conference, and 2015 FMA European Conference for their comments and suggestions. We also thank Thomson Reuters for
providing access to the Thomson Reuters News Analytics database, and we
appreciate the assistance of Maciej Pomalecki and Xuehui Hou in accessing the
data. We acknowledge research funding provided by the University of Auckland
Business School.
⇑ Corresponding author. Tel.: +64 9 923 7175.
E-mail addresses: s.cahan@auckland.ac.nz (S.F. Cahan), chen.chen2@monash.edu
(C. Chen), li.chen@auckland.ac.nz (L. Chen), n.h.nguyen@massey.ac.nz (N.H.
Nguyen).
1 Tel.: +61 3 9903 4566. 2 Tel.: +64 9 923 7484. 3 Tel.: +64 9 414 0800×43179.
Journal of Banking & Finance 59 (2015) 409–422
Contents lists available at ScienceDirect
Journal of Banking & Finance
journal homepage: www.elsevier.com/locate/jbf
(Di Giuli and Kostovetsky, 2014). In 2012, large US firms spent $28
billion on sustainability and $15 billion on corporate philanthropy
(Di Giuli and Kostovetsky, 2014), and 93% of CEOs responding to a
2010 UN survey stated that CSR was ‘important’ or ‘very important’
to the future success of their firm (Cheng et al., 2013). Second,
Fombrun and Shanley (1990) develop a model of reputation building where social responsiveness in the prior period is one factor
that can affect a firm’s media image in the current period.
However, to our knowledge, the link between CSR and a firm’s
overall media image has not been empirically examined.
For CSR to affect a firm’s wider media coverage, the media must
have incentives to report more positively about good CSR firms.
Mullainathan and Shleifer (2005) develop a demand-side model of
media slant in which the media caters to the beliefs of their readers.
They define slanting as a process where, given a set of facts, the
media portrays a subject favorably or unfavorably through selective
reporting. This model assumes that readers prefer news that is consistent with their beliefs – an assumption that is supported by
research in communications (e.g., Graber, 1984; Severin and
Tankard, 1992) and psychology (e.g., Bartlett, 1932; Klayman,
1995). Thus, slanting attracts readers, and Mullainathan and
Shleifer (2005) show that slant can persist even when readers have
homogeneous beliefs and when there are competing media sources.
Surveys of public opinion consistently show that corporate
behavior matters (e.g., Epstein-Reeves, 2010; Grant Thornton,
2011; Cone, 2013). For example, Epstein-Reeves (2010) finds that
88% of consumers think companies should try to achieve their
business goals while improving society and the environment, and
83% think companies should support charities and non-profits with
financial donations. In our context, if the public prefers companies
that are good corporate citizens and wants them to succeed,
Mullainathan and Shleifer’s (2005) catering theory predicts that
the media would provide more favorable coverage of firms with
good CSR performance. Consistent with this notion, El Ghoul
et al. (2011, 2390) suggest that ‘‘the media are more inclined to
spend time analyzing and reporting news about ‘good’ [CSR]
firms’’, although they do not test this expectation. Further, if firms
that are good CSR performers receive more favorable media coverage, managers have incentives to actively manage their media
image by being more socially responsible, as long as a positive
media image is economically beneficial.
Consequently, we consider three research questions derived
from the discussion above. First, is there a link between good corporate citizenship and favorable media coverage? Second, to the
extent there is a link, do firms actively manage CSR to gain more
favorable media coverage? Third, to consider the economic incentives that motivate such behavior, do firms with better CSR performance and more favorable media coverage benefit in terms of a
higher firm value or lower cost of capital? We divide our study into
three parts to examine each of these questions.
We rate news favorability using a measure of news tone or sentiment from Thomson Reuters News Analytics (TRNA). TRNA
employs a lexical analysis that uses a knowledge-driven neural
network to score each news item released about a firm in terms
of its positivity and negativity. Using all news stories about a firm
in a period, we compute the difference between the positive and
negative news sentiment scores from TRNA to proxy for media
favorability.4 Our media dataset includes 469,550 unique news stories during the period 2003–2011. We use CSR performance data
from the KLD (now MSCI ESG STATS) database.
In the first part of the study, we consider whether good CSR
firms have a more positive overall media image. We regress media
favorability on the firm’s CSR performance and find a positive relation, consistent with better performing CSR firms receiving more
positive news coverage from the business press. However, we
acknowledge that the endogeneity issues, such as omitted variables and reverse causality, may confound our tests.
Supplemental analyses using instrumental variables and propensity score matching support our main results. Further, we conduct
a quasi-natural experiment based on an executive order signed by
President Barack Obama on September 25, 2012 that strengthened
protections against labor trafficking by federal contractors and
subcontractors.5 This executive order would have affected CSR performance in the human rights area, but it would not have had a
direct effect on overall media favorability. The results of this analysis
support a causal relation where CSR performance affects media
favorability.
In the second part of the study, we consider whether firms
actively manage CSR in order to obtain more favorable media
image. In other words, a positive relation between CSR and media
favorability could arise if firms engage in CSR for other reasons
(e.g., altruism) in which case a positive media image is just an
attractive side-benefit. To provide evidence on active media management, we conduct three tests. First, we explore whether the
relation between CSR and media favorability is stronger in the
so-called ‘sin’ industries (i.e., alcohol, gambling, and tobacco). We
expect that sin firms would have greater incentives to promote a
more positive image, and we find a stronger relation between
CSR and media favorability for sin firms. Second, we expect that
all firms would have more incentive to increase media favorability
when the prevailing market-wide investor sentiment is more pessimistic. Since investor sentiment reflects a broad social mood that
can affect investor behavior generally, firms would be motivated to
counteract investors’ pessimistic outlook. We find that the relation
between CSR and media favorability is stronger when investor sentiment is low, consistent with firms actively managing CSR during
these periods. Third, we expect firms to use CSR to manage their
media image before a seasoned equity offerings. For a sample of
SEO firms which have less favorable media coverage before SEO,
we compare their CSR performance two years before the SEO with
their CSR performance in the year before and year of the SEO. We
find that CSR performance is higher in the SEO period, consistent
with firms trying to generate a more positive media image in the
lead-up to the SEO.
In the third part of the study, we explore the economic benefits
associated with better CSR performance and more favorable media
coverage. If there are no economic benefits, it is difficult to argue
that managers have incentives to use CSR to actively manage their
media image. El Ghoul et al. (2011) find that firms with better CSR
performance have a lower cost of capital. They speculate that
media coverage plays a role because, based on Merton (1987),
investors cannot invest in securities that they do not know about.
If the media provides more coverage, and more favorable coverage,
of good CSR firms, investors’ awareness and interest in these firms
increase. While El Ghoul et al. (2011) examine the link between
CSR performance and cost of capital, they do not explore the media
link.
We use firm value and the implied cost of capital to measure
economic benefits. We find that for firms that have both high
CSR performance and more positive media coverage, the coefficient
of the interaction between CSR performance and media favorability is positive (negative) and significant for the Tobin’s Q (cost of 4 Consistent with Gurun and Butler (2012), who examine the relation between
advertising and overall media coverage, our measure of media favorability is based on
all articles about a firm in a period, not only articles that report on CSR activity.
However, in sensitivity tests, we exclude the CSR-related articles in computing media
favorability. Our results are qualitatively unchanged.
5 The full content of the executive order is available on the following webpage:
http://www.whitehouse.gov/the-press-office/2012/09/25/executive-order-strengthening-protections-against-trafficking-persons-fe.
410 S.F. Cahan et al. / Journal of Banking & Finance 59 (2015) 409–422
capital) test. These results suggest that firms that successfully
manage their media favorability by performing better in the CSR
arena realize economic benefits from their positive media image.
Our study contributes to the literature in two important ways.
First, we contribute to an emerging line of research that considers
how firms may proactively manage their media image (e.g., Gurun
and Butler, 2012; Solomon, 2012; Ahern and Sosyura, 2014). We
add to this limited line of research by examining a less obvious
channel that firms can use to manage their media image, namely
their CSR performance. Second, we contribute to an expansive literature on CSR performance by documenting a previously unexplored incentive for firms engaging in CSR, i.e., active media
management.6
The remainder of the paper is organized as follows. Section 2
describes the research design. Sections 3, 4, and 5 report the results
of parts 1, 2, and 3 of the study, respectively. Section 6 concludes.
2. Research design
2.1. Data and sample
We collect media sentiment data from the TRNA database from
January 2003 to December 2011. A full description of the classification and scoring process used by TRNA is provided in Appendix A.
TRNA provides three sentiment scores, ranging from 0 to 1, that
reflect the probability that a specific news item is positive, negative, or neutral (the scores sum to 1). Following Bushee et al.
(2010), we classify news items based on their source, specifically,
press-initiated or firm-initiated. We classify news items carried
on a press release wire (e.g., Business Wire, Prime Newswire, PR
Newswire) as firm-initiated. Since our objective is to study the
impact of CSR on the news media, we focus on press-initiated news
items, although we control for firm-initiated news since the press
could be influenced by press releases issued by the firm (e.g.,
Solomon, 2012; Ahern and Sosyura, 2014). Finally, we reiterate
that our measure of media favorability is based on all news reports
about a firm, not just those related to CSR activity, as we are interested in the media’s overall treatment of the firm, i.e., the firm’s
media image.7
We extract data from KLD, Compustat, CRSP and I/B/E/S databases to calculate the remaining variables in our regression models. The sample size varies depending on the analysis. We have a
maximum of 12,749 firm-year observations.
2.2. Measurement of variables
2.2.1. CSR performance
KLD evaluates firms’ CSR performance in seven qualitative issue
areas, i.e., corporate governance, community, diversity, employee
relations, environment, human rights, and product. We compute
a total CSR score (CSR) for each firm at the end of year t by summing the net scores (strengths minus concerns) of community,
diversity, employee relations, environment, human rights, and
product.8 We include the corporate governance score as a control
variable rather than as part of CSR (e.g., Kim et al., 2012; Di Giuli
and Kostovetsky, 2014).
The KLD rating is an annual measure where the rating, which is
typically released in June or July, is based on information pertaining to the prior calendar year. For example, a KLD rating issued in
June 2011 is based on CSR data from the 2010 calendar year. Thus,
the KLD rating is essentially a lagged measure relative to our measure of media favorability (which is described in below). For example, in 2011 for a firm with a December 31 year-end, we compute
media favorability using all articles from January 1, 2011 to
December 31, 2011 and we use the KLD rating released in 2011,
which is based on CSR data from January 1, 2010 to December
31, 2010. For a small subset of firms (e.g., a firm with a
September 30 year-end), there could be some overlap between
our CSR and media measures. We address this concern in
Section 3.3.