Media coverage of corporate wrongdoing is an important part of holding executives accountable, according to a new study from a University of Iowa researcher, and shows the value of a robust watchdog media.
The study, from Dain Donelson, Henry B. Tippie Excellence Chair and professor of accounting and law, looked at shareholder lawsuits brought against firms that engaged in corporate backdating, a practice covered by The Wall Street Journal (WSJ) in a Pulitzer Prize-winning series of stories published in 2006 and 2007. The WSJ investigation was based on a 2005 study by Tippie Finance Professor Erik Lie, who was named one of the TIME 100 for his uncovering of the stock option backdating scandal.
Lie’s study found a significant number of firms had been backdating stock options or misrepresenting the option grant dates to when the stock was selling for a higher price so that the option was more valuable. The practice violates federal securities law. The WSJ investigation that followed found backdating to be even more widespread and led to numerous shareholder lawsuits against firms that gave backdated options to their managers, as well as investigations by federal regulatory agencies.
Donelson says the WSJ series increased litigation probability by an economically meaningful amount. For example, being named by the newspaper increased case filing likelihood in the same quarter by 45%, and by 60% overall.
The study also found a market impact of the newspaper’s coverage, as stock prices of companies named in the investigation fell up to 5% in the week following publication.
Donelson says the coverage led to more lawsuits in part because the stories brought attention of the wrongdoing to shareholders and attorneys. Many of the lawsuits filed against firms cited the WSJ’s investigation in their filings.
But the coverage did more than just shine a public light on the backdating. Donelson says it also helped plaintiff’s lawyers by essentially acting as an expert witness, prompting companies that engaged in backdating to realize they needed to settle. In the backdating lawsuits, he says plaintiff’s lawyers “outsourced” much of their investigation to The Wall Street Journal and other media outlets that covered the scandal.
To discover if the WSJ’s coverage was responsible for the litigation, Donelson and his research team compared the outcome of those firms named in news coverage to those firms that engaged in backdating but were not publicly identified by media. They found 88% of firms identified in the newspaper’s investigation were sued, compared to only 4% that the WSJ didn’t identify.
Donelson says the results of The Wall Street Journal’s investigation show the need for a vigilant media to act as a check on corporate misbehavior.