Friends at WSJ Guosong Xu∗ January 28, 2020 Abstract I study the effect of the firm–journalist connections on media slant and stock returns, us- ing a dataset on the firm’s connections to Wall Street Journal reporters. When corporate events are covered by connected reporters, the news sentiment becomes markedly more favorable, leading to higher short-term stock returns and long-term price corrections. For identification, I instrument the connected coverage with the reporters’ turnover and find similar results. Connections to the media owner also matter: using Rupert Murdoch’s acquisition of the WSJ as an exogenous shock, I show that firms connected to Murdoch receive better coverage after the ownership change. JEL classification: G14, G34, G40 Keywords: News sentiment, Mergers and acquisitions, Financial journalism, Social connections ∗Department of Finance, Erasmus University, Rotterdam School of Management. Mail: Burgemeester Oudlaan 50, 3062 PA Rotterdam, Netherlands. Email: [email protected]. For helpful comments I thank Nihat Aktas, Yakov Amihud, Bernard Black, Audra Boone, Eric de Bodt, Travers Barclay Child, Lin Willian Cong, Olivier Dessaint, Daniel Dorn, Daniel Ferreira, Eliezer Fich, Andrey Golubov, Markku Kaustia, Matti Keloharju, Cohen Lauren, Erik Loualiche (discussant), Tim Loughran (discussant), Song Ma, Mario Schabus (discussant), Ishita Sen (discussant), Paul Smeets, Noah Stoffman, Vladimir Vladimirov, Michael Weber, Burcin Yurtoglu, and participants at the 2018 European Finance Association Meeting Doctoral Tutorial, CEIBS Finance and Accounting Symposium, Helsinki Finance Summit, Paris December Finance Meeting, Aalto University, Drexel University, Erasmus University, ESCP-Europe, Fudan University School of Management, Humboldt University in Berlin, Paris-Dauphine University, and University of Strathclyde. 1 Introduction How are media stories created? A number of studies reveal that the media have an important impact on the financial market.1 Key to this relation is an author’s persuasion, views, or bias injected into the news article (Dougal et al., 2012). However, evidence on the influences that shape financial journalists’ view in news production is limited. In this paper, I explore one particular channel of influence: that of personal social networks. Specifically, I study whether relationships between a firm and a journalist represent a mechanism for influencing the tone, or “slant,” of financial news and the consequences for asset price. The expected effect of the journalist–firm connections is not obvious ex-ante. On the one hand, if financial media compete using accuracy for rational investors, a well-connected journalist could yield more accurate reporting by catalyzing the information flow. On the other hand, a business reporter beholden to a firm might inject his personal opinion and slant the story in favor of the firm because he relies on company management for information (Call et al., 2018) or exhibits homophily due to a shared background (Gompers et al., 2016). To assess the effect of the journalists’ connections, I assemble a set of financial news articles published in the Wall Street Journal (WSJ) over the past 20 years. The choice of WSJ is natural because the WSJ is by far the largest print newspaper in the United States.2 In addition, the WSJ is extremely well-established among finance and investment professionals. I focus on one type of corporate news, namely, the WSJ coverage of corporate takeovers. Given their financial magnitude and importance, merger transactions elicit substantial investor scrutiny and attention, but the assessment of the deal synergies is subject to an individual perspective. Therefore, any distortion in the media news production may result in real wealth effects among parties to the transaction. Moreover, focusing on this homogeneous event type enables me to better control for determinants of the underlying transaction quality, motivated 1 See, for example, Huberman and Regev(2001), Tetlock(2007), Tetlock et al.(2008), Engelberg and Parsons (2011), and Peress(2014). 2 The average weekday circulation of the WSJ is above 2 million according to Alliance for Audited Media as of March 31, 2013. Alternatively, I also examine the news articles published in the New York Times. 1 by a large body of M&A literature. Next, I obtain from Bloomberg and major professional network websites the college names of the acquirers’ CEOs and of the authors of the WSJ articles. This allows me to observe, for instance, whether John Riccitiello, the Chief Executive of Electronic Arts, attended the same college as the one attended by the WSJ reporter, Nick Wingfield, who wrote about the Electronic Arts’ acquisition of Take-Two in February 2008. Additionally, using the WSJ search engines and Factiva, I also capture the potential working relationships between a firm and a journalist by examining if a specific reporter wrote at least two exclusive non-M&A related stories about that firm during the 12 months prior to an acquisition. This approach follows Solomon(2012), which reflects the idea that if a journalist frequently covers a firm, he is more likely to build a personal relationship with that firm’s employees. Now the key question: do such relationships matter in terms of news tonality and investor reactions? Some key pieces of evidence suggest a meaningful media slant in articles authored by journalists in a firm’s social network. First, in the cross section, news articles from a connected journalist include significantly fewer negative-sentiment words describing the firm, defined by Loughran and McDonald.3 For example, all else equal, the use of negative words is 23.6% lower in the stories written by journalists who have working experiences with the acquirer (t = 3.98 for the difference). Similarly, articles authored by a journalist who attended the same college as the acquirer’s CEO contain markedly 13.2% fewer negative words (t = 2.31). Second, exploring within-journalist variations, I find that the fraction of negative words in an article about a connected firm is significantly lower than other articles written by the same author. These models reject the possibility that a journalist’s general writing styles are driving the slant in connected reports (Dougal et al., 2012). One obvious challenge in interpreting the relation between slant and connection is that it may reflect reverse causation running from news tone to journalist connections. As Tetlock 3 See Loughran and McDonald(2011, 2016, 2017), Bodnaruk et al.(2015), and the dedicated website: http: //sraf.nd.edu/. 2 (2007) notes, “It is unclear whether the financial news media induces, amplifies, or simply reflects investors’ interpretations of stock market performance.” In this context, a connected journalist may be assigned to write about better deals after having observed market reactions. To address this concern, in all my main tests, I include several lags of returns. Moreover, I supplement the WSJ sample with media stories from the New York Times that cover the same event. In this pooled sample, I saturate my empirical models with highly granular merger fixed effects to effectively control for all event-specific characteristics, including deal qualities. Similar to the previous findings, this analysis suggests a significant less use of negative words in stories by a connected journalist relative to those by an independent journalist, even though the information content of the underlying event remains identical. To further provide a plausibly causal interpretation, I adopt an instrument variable (IV) method. Specifically, I instrument the likelihood of a connected coverage with the turnovers of a firm’s connected journalists. The basic idea is as follows: Returning to the example of Electronic Arts, suppose the firm has access to one connected reporter; shortly before Electronic Arts announced its bid in February 2008, the connected reporter left the WSJ; therefore, the likelihood of this bid being covered by a friendly reporter becomes virtually zero.4 Importantly, the turnover of journalists is likely due to events exogenous to the M&A deals or the firms they write about (Solomon, 2012). With the IV approach, I continue to find a significant connection effect on news tone. Having established the link between slant and journalist connections, I examine whether this favorable coverage alters market reaction to the acquisition. On the one hand, if investors are fully aware of the biased content produced by a financial reporter, then slant should not affect stock prices. On the other hand, if investors face difficulties in figuring out potential social networks between a firm and media, there is good reason to predict that higher media sentiment in a connected report may generate better stock market reactions. 4 To avoid the potential replacement of journalist connections, I focus solely on cases where all connected journalists of a firm leave the newspaper. See details in Section 4.2. 3 Evidence suggests a strong relation between journalist connections and the abnormal stock returns in the two days following the news publication. All else being equal, stock returns are significantly higher to the acquirers whose deal is covered by a journalist with retrospective working relationships. The relation remains when I instrument the connection with journalists’ turnovers. Exploring the mechanism underlying the connection effects on stock returns, I find that the market responses are attenuated in firms with higher stock liquidity or more rational arbitrageurs, measured by greater analysts’ coverage,