The media can influence managers' actions by influencing the value of managers' reputational capital (Dyck et al., 2008). We find that negative media tone has a negative and significant impact on the change in CEO power. Previous research has mainly focused on the signaling effects of media coverage and CEO compensation (Core et al., 2008; Bednar, 2012).
Previous literature has examined the potential effects of media coverage on CEO compensation ( Core et al. , 2008 ; Chen et al. , 2013 ). In our study, we follow Bebchuk et al. 2011) in constructing the CPS measure based on CEO compensation.
Variables 1. CEO Power
Firm Performance
Q is defined as the market value of equity plus the book value of assets minus the sum of the book value of common equity and deferred taxes divided by the book value of assets. Second, industry-adjusted ROA is defined as net income before extraordinary items and discontinued operations divided by total assets less the median ROA based on the four-digit industry SIC code. Third, stock return is the annualized stock return for the calendar year, based on the monthly CRSP stock file to calculate one-year compound returns, including dividends.
Media Variables
Following previous literature, we construct firm and CEO characteristics as control variables ( Bebchuk et al. , 2011 ; Bednar et al. , 2013 ). CPS has a rich set of relationships with firm performance, value and firm behavior (Bebchuk et al., 2011). In addition, structural features of boards can limit or enable managerial power (Van Essen et al., 2015).
Based on agency theory, Combs et al. 2007) argue that board structure is of greatest concern to shareholders when the CEO is powerful. The mean of CEO tenure is approximately 7.2, which is consistent with the variable used in Bebchuk et al.
Methodology
The average measures for industry-adjusted Tobin's Q and Leverage are similar to those reported by Bhagat and Bolton (2008). Summary statistics for other variables show that the average age of CEOs, Chairman and Board size are about 56, 0.65 and 10.33, respectively. While the rank order correlation is slightly higher for some variables (notably Postone and %Appointed = 44.3%; media favoritism and %nominated insider ownership and CEO ownership = 46.3%), the tabulated variance inflation factors of the empirical estimates are all below 6 (not reported), indicating that multicollinearity is not a concern for the regression analysis.
We then further examine the interaction effect of media coverage and CEO power on firm performance. We then regress the firm performance on key determinants of firm performance documented in the previous literature as presented in equation (4) below. This equation models firm performance as a function of media tone, CEO power, and both firm-specific variables and CEO-specific variables.
Empirical Results
Impact of Media Tone on the Change in CPS
The pooled panel regression results, displayed in Columns 1 and 2 of Table 3, indicate a strong negative association between negative tone and change in CPS. From Column 1, Negative tone has strong economic significance: a one standard deviation increase in negative tone (equal to 0.948) lowers CPS total compensation by 1.7%.3 Using the mean (median) measures of top-five managers' total compensation corresponds to a decrease of. Similarly, in Column 2, a one standard deviation increase in the negative tone of media coverage translates into a decrease in CPS total of 1.6% corresponding to using mean (median) pay for the top-five paid executives.4 The findings imply that the power of a CEO as measured by CPS total compensation is reduced when media coverage has a more negative tone.
So the more bad press a CEO and his company is exposed to, the greater the subsequent decline in ∆CPS Total. In contrast, the coefficients reported in columns 3 and 4 for Postone are not statistically significant, indicating that there is no evidence to support H1(b). These results suggest that CEO power, as measured by the change in total CPS compensation, decreases when media coverage has a negative tone.
Next, we consider the individual components of total compensation to determine which compensation components drive our results. We examine the relationship between media tone and the change in CPS for each of these compensation components as shown in Table 4. The results in Tables 3 and 4 document no statistically significant relationships between the positive tone (or media favoritism) and change in CPS.
However, we report evidence of a significant, negative association between negative media tone and change in total CPS compensation. The results are consistent with H1(a) and support the view that media tone can influence CPS change. These findings provide some evidence that media tone plays an important governance role in influencing CEO power change.
Interaction Effect of Media Tone and Change in CPS on Firm Performance
The coefficient for the interaction between Negtone and ΔCPS total is positive and not significant in column 1. Industry-adjusted ROA, defined as operating income divided by the book value of assets, adjusted at the four-digit SIC industry level, is the second measure of firm performance. The coefficient for the interaction of Negtone and ΔCPS total, reported in column 4, is positive and significant, but is inconsistent with the disciplinary hypothesis.
In column 5 of Table 5, the coefficient for the interaction of Postone and ΔCPS is totally positive and statistically significant (0.018, p<0.01). The results imply that the more positive the tone of media content and the greater the differentiation between the CEO's salary and the other top four paid executives, the better the subsequent firm performance. Furthermore, the interaction of media favorability and ΔCPS total on industry-adjusted ROA is positive and statistically significant as shown in column 6, suggesting that the more favorable the media tone together with greater CEO power also improves firm performance.
In columns 7 and 8, while the signs of the regression coefficient for the interaction terms between total ΔCPS with Negtone and Postone are consistent with H2(a) and H2(b), the results are not, however, statistically significant. The coefficient measuring the interaction of media favorability and ΔCPS Total on the stock return reported in column 9 is. Subsequent stock returns improve if both media favorability and the change in Total CPS increase.
Overall, these results provide evidence consistent with H2(b) and H2(c) and support the endorsement hypothesis in terms of news diffusion. Media tone can moderate strong CEOs and improve the subsequent value of the firm following the spread of news with a positive tone in the previous year. Similarly, firm performance also improves when firms led by stronger CEOs experience greater media favorability.
Robustness Test 1 Endogeneity
Pre-2006 vs post-2006
In 2006, the vast majority of firms switched to the new reporting requirements (FAS123R) and the change in executive compensation compared to pre-2006 is misleading (Coles et al., 2014). Given this significant change in executive compensation disclosure, we examine the role of media coverage on CEO power in the period 1996-2005 and 2007-2014, respectively.7 We find that Negtone's coefficient is negative and statistically significant. important in post-2006. The consistency test suggests that the effect of media tone on change in CPS is more widespread in
The importance of recent observations is consistent with the influence and prominence of the media and its role in society as a transmitter of information during the latter part of the study. Therefore, it makes intuitive sense that we find greater consistency in the period after 2006 than before 2006. This result is also consistent with the technological and cultural change in the role and impact of the media on the communication of information.
Our results on negative tone in post-2006 are consistent with our original findings presented in Table 3.
Conclusion
In particular, we find that the impact of positive tone along with a change in CPS total has a significant positive association with firm performance (i.e., industry-adjusted Tobin's Q and industry-adjusted ROA). We also report no evidence that the interaction between negative tone and change in CPS total compensation is negatively and significantly related to firm performance. In summary, we hope that this study can help to promote a behavioral view on the role of the media in corporate governance.
The role of the media in corporate governance: Does the media influence managers' capital allocation decisions. The ratio of the CEO's total equity compensation to the sum of equity payments made to the five highest paid executives, including the CEO CPS Optiont+1. The ratio of the CEO's total option compensation to the sum of the option compensation paid to the five highest paid executives including the CEO.
Media favorite The natural logarithm of the ratio of positive-tone words to negative-tone words from the financial dictionary. Book value The natural logarithm of the book value of assets Leverage The ratio of long-term debt to assets. Relative Equity The ratio of the CEO's share of equity compensation to the average share of equity compensation of the other four top executives.
Founder A dummy variable equal to one if the CEO is the founder of the firm, zero otherwise. This table reports the panel regression of the change in total CPS compensation on media tone. This table reports the panel regression of the change in CPS cash, equity, and option compensation on media tone.
Managerial Control Variables NO YES NO YES NO YES Panel B: Media Coverage and Change in CPS Equity. Managerial Control Variables NO YES NO YES NO YES Panel C: Media Coverage and Change in CPS Option. This table presents regression results of the interaction effects of media tone and change in CPS total compensation on fixed value as given by Equation 4, 𝐹𝑖𝑟𝑚 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑛+1. 𝛼1𝑀𝑒𝑑𝑖𝑎 𝑇𝑜𝑛𝑒𝑖,𝑡+ 𝛼2 ∆𝐶𝑃𝑆 𝑇𝑜𝑡𝑀𝑖+1+3. 𝑑𝑖𝑎 𝑇𝑜𝑛𝑒𝑖,𝑡× ∆ 𝐶𝑃𝑆 𝑇𝑜𝑡𝑎𝑙𝑖.𝑡+1.
Panel A reports the results of the first stage pooled OLS regression, where Negtone, Postone, and Media Preference are dependent variables.
