We understand that media ownership can be translated into power, especially when a media outlet has a dominant owner and the context is politics. Rupert Murdoch, Fox, and Donald J. Trump are keywords that come to mind. That’s just a rich guy playing around with the governance of a nation, with no connection to the world of business competition, right? Wrong. Media ownership also affects competition among firms, and the effects are seen also when the ownership structure is more dispersed.
This is the main discovery made in a paper published in Administrative Science Quarterly byMark R. DesJardine, Wei Shi, and, Xin Cheng. Their starting point is the remarkable concentration in firm ownership that has happened following the growth in institutional investments in the form of fund management firms. These investors want to (in fact, are obliged to) maximize the returns of their holdings, so they will do whatever it takes to increase the value of the firms they own.
What does “whatever it takes” mean? This is where media ownership comes into play. An interesting feature of owning media firms is that media firms are involved in news gathering and reporting, which can influence the competitive balance of an industry. Hurt one firm, and the other gains. Report selectively, and the value of firms owned by the fund that also owns media outlets will increase. As a result, media talk is expensive for the competitors of firms that have a media connection in their ownership.
Such media effects are a very big deal because they show an illicit use of media ownership that tilts valuations of firms, and corresponding access to resources and success in markets, away from the products and services they provide. They can only happen as a result of unethical actions by media executives and editors.
The research they present has plenty of evidence. Media coverage turns negative when a competitor firm has financial links with the media. This effect is stronger for competitors with more similar product lines, so relevance increases negativity. The effect is stronger for competitors nearby, so proximity increases negativity. And, most perniciously, if the media company CEO has equity-based compensation, so the CEO gets paid more when the media company value increases, the effect is also stronger. In sum, negative media coverage is a result of financial links, and it is particularly negative when the competitive relations between firms are close and when the media company CEO is for sale.
Should we worry about this? People arguing that “talk is cheap” would not be too concerned about these findings. But media coverage has significant consequences for firms, especially for their access to financial resources, so seeing it can be tilted so easily means that there is one more area of competition that requires regulatory attention. We cannot have an economy and society in which consequential, expensive talk is for sale.
DesJardine, Mark R. , Wei Shi, and, Xin Cheng. 2023. The New Invisible Hand: How Common Owners Use the Media as a Strategic Tool. Administrative Science Quarterly, forthcoming.
This blog is devoted to discussions of how events in the news illustrate organizational research and can be explained by organizational theory. It is only updated when I have time to spare.