The role of the media in corporate governance:

Do the media influence managers capital allocation

decisions?
Written by: Baixiao Liu and John J. McConnell
Published in: Journal of Financial Economics 110
(2013) p. 117
Presented by:
Dorian Jaumotte i607207
Alexander Shehata i60
Nikos Bozikis - i

Model Development

Managers act in their own self-interest

Suggests Correlation between managers decisions to abandon the acquisition and the stock price
reaction

Possible Explanation: Managers listen to the market

WHY: Because of SELF INTEREST

RISKS:

Tangible capital (loss due to stock price drop)

Human capital (reputation: future employment and wages)

IMPORTANT: After announcement of an acquisition these are sunk costs

Model Development
Managers Decision Making

Managers need to weigh the benefits of the acquisition against its costs

Benefits: Bonus for completion

Costs: Loss in tangible capital & Loss in reputational capital

If Private benefits + Tangible capital + Reputational capital < 0;

Then abandon

Model Development & Hypotheses

H1: In deciding whether to abandon a value-reducing acquisition attempt, a

CEO is more likely to abandon the proposed transaction the more negative is
the change in the CEO's tangible capital at the announcement of the
transaction.

In short: P (Abandonment) goes up if change in tangible capital is bigger

H2: In deciding whether to abandon a value-reducing acquisition attempt, a

CEO is more sensitive to the stock market reaction the greater the level of
media attention given to the proposed transaction.

In short: Abandon-decision more sensitive to the stock market reaction the

greater the level of media attention

Model Development & Hypotheses

H3: In deciding whether to abandon a value-reducing acquisition attempt, a

CEO is more sensitive to the stock market reaction when the proposed
acquisition receives a higher level of media attention in combination with a
more negative tone of media coverage.
In short: Abandon-decision more sensitive to the stock market reaction when
attention (high) in combination with tone (negative)

Data and research design

Which deals to include

Data was retrieved from SDC M&A database

A selection was made using criteria

Transaction value >= $100 million

Accompanied by a negative stock market reaction at its announcement

(1/1/1990-31/12/2010)

Result: 636 observations

121 abandoned deals

Key variables
How to measure our independent variables

Tangible Capital => CEO ownership * 3-day CAR

CEO ownership from database or proxy statement

Media attention => # of articles within ten days in NYT, WSJ or DJNS

Media tone => Use of negative words as a percentage of total words

Control variables were taken from previous research