FAYETTEVILLE, Ark. — Just as the free press affects the checks and balances of the political system, the financial press influences corporate governance by providing essential information to stakeholders. But it works, at least in part, because the press is acting in its own self-interest, according to University of Arkansas researcher Jon Johnson, associate professor of management in the Walton College of Business.

Johnson; Alan Ellstrand, assistant professor of management; and graduate student Michael Hennelly argue the importance of the financial press as a monitoring mechanism in corporate governance in a paper presented last week at the 2002 Annual Meeting of the Academy of Management in Denver.

"It seems so obvious, we were really surprised to find that no one had looked at the impact of the press on governance issues," said Johnson. "Many researchers have looked at the influence of ownership of press outlets on coverage of other corporate activities, but there has been nothing on its impact on corporate governance issues."

Although the financial press is an inescapable part of the daily lives of investors and managers, it is usually regarded as a passive conduit for information. However, the researchers emphasize that "the press is composed of actors with interests and influence of their own, which affects the information that is uncovered and disseminated."

According to Johnson, this makes the press "an important monitoring mechanism that both stands apart from and supplements other governance devices."

The researchers explored the relationship by applying agency theory, which looks at the relationships between principals (owners) and agents (managers). According to the theory, each is assumed to be self-interested and to have a different set of skills.

According to agency theory, under conditions of incomplete information and uncertainty — information asymmetry — two agency problems arise: adverse selection and moral hazard. Adverse selection means that the principal cannot tell if the agent can actually do the work for which he is being paid and moral hazard means that the principal cannot be sure if the agent has expended his best effort.

"The business press is a primary player in the reduction of information asymmetry," explained Johnson. "Major financial newspapers are the source of much information that investors react to, and articles in business periodicals may be the primary source of information that investors use to evaluate management and board decisions. The Enron debacle was not disclosed by the board, the auditors, analysts, or the SEC, even though each of these actors had sufficient information to be concerned. Stories in the Wall Street Journal got the ball rolling.."

The researchers also use agency theory to explain the motivations of the financial press, which is also acting, in part, in its own self interest. Media outlets are concerned with providing accurate information so that they will attract consumers; reporters are concerned with providing accurate information so they will be considered valuable by the top media outlets.

However, because a reader cannot immediately know if a given article contains thoroughly investigated, accurate information, information asymmetry also exists between the business press and its audience. The researchers identified several issues that can influence this problem, including reputation, intellectual capital and social capital.

"When uncertainty and trust are at issue in a market exchange, reputation becomes valuable," explained Johnson. "A favorable reputation may be the most valuable intangible asset for a business publication. It will not only increase demand for the publication, it may give journalists working for the publication greater access to scarce information."

Reputation also influences human capital, since knowledgeable journalists will seek out employers with good reputations. And the combined human capital and reputation will provide the journalists with the contacts within organizations — social capital — to acquire access to information that isn’t available to the public.

"For example, articles in the Wall Street Journal regularly contain information from interviews with top managers and other key actors that other, less well-known publications do not," said Ellstrand. "And reputable publications are most likely to attract informants with valid unsolicited information about an organization."

But all of this does not mean that the financial press will be willing to rigorously monitor business organizations. The researchers point to a reliance on advertising as a factor that influences coverage and conclude that the press who have more of their income coming from subscriptions will be more vigilant in monitoring and reporting on corporate governance.

Press ownership is particularly likely to affect coverage of corporate governance in large, diversified organizations, since the press is more likely to offend an advertiser in a broad network of suppliers and customers. But location also plays a part. Local and regional press may have better information about a local corporation, but the power those companies can wield at a local level may make reporters unwilling to be as vigorous in reporting on management issues, so national press may be more vigilant in reporting than local or regional press outlets.

"We believe that the press role as a monitoring mechanism is an important addition to the traditional formal and market mechanisms proposed by agency theorists," said Johnson. It is certainly not the only monitoring mechanism, but it does play an important role in conjunction with them."