The
Corporate Governance Role of the
Media: Evidence from Russia
ALEXANDER DYCK, NATALYA VOLCHKOVA, and LUIGI ZINGALES∗
ABSTRACT
We study the effect of media coverage on corporate governance by focusing on Russia
in the period 1999 to 2002. We find that an investment fund’s lobbying increases coverage
of corporate governance violations in the Anglo-American press. We also find
that coverage in the Anglo-American press increases the probability that a corporate
governance violation is reversed. This effect is present even when we instrument
coverage with an exogenous determinant, the fund’s portfolio composition at the beginning
of the period. The fund’s
strategy seems to work in part by impacting Russian
companies’ reputation abroad and in part by forcing regulators into action.
IN RECENT YEARS HEDGE FUNDS have emerged as among some of the most powerful
players in corporate governance worldwide. From the dismissal of
Deutsche
Boerse’s CEO Seifert to McDonalds’ spin-off of major assets in an IPO, hedge
funds have played a crucial role. TheWall Street Journal labeled them the “new
leader” on the “list of bogeymen haunting the corporate boardroom.”1 Among
the many tactics hedge fund managers use, the most prominent is the tactic
of focusing public attention on an underperforming company and shaming the
CEO to either resign or change policy (Kahan and Rock (2006)).
It is hard to tell, however, whether such a
public relations campaign is just a
smokescreen for more important maneuvers that take place behind the scenes
or is a crucial ingredient of their battle. Can hedge funds (or shareholders
in general) increase the level of coverage received by certain news/companies?
And if so, does this coverage have any effect on corporate governance outcomes?
These questions are hard to address using U.S. data. Because most hedge funds
trade in and out of companies very quickly, it is hard to disentangle whether
they are simply good at recognizing that the situation is ripe for change or
∗Alexander Dyck is from the University of Toronto. He thanks the Gamma Foundation, the Division
of Research, Harvard Business School, and the Rotman School of Management for financial
support. Natalya Volchkova is from the New Economic School and works with CEFIR. Luigi Zingales
is from the University of Chicago and works with NBER and CEPR. He thanks the Gamma
Foundation, the CRSP center, and the George Stigler Center at the University of Chicago for financial
support. We thank Beatriz Armendariz, Stefano della Vigna, Andrei Shleifer, Andrei Simonov,
Ekaterina Zhuravskaya, and seminar participants at Dartmouth, Harvard, Stockholm School of
Economics and the NBER for very useful comments.We thank Mehmet Beceren and Victor Xin for
their research assistance.
1 AlanMurray “Hedge Funds Are New Sheriffs of Boardroom,”Wall Street Journal, 14 December
2005, pg. A2.
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1094 The Journal of Finance
whether they are indeed an agent of change. Further, because hedge funds in
the United States (and in most of Europe) also have access to an array of options
to address bad corporate governance (from shareholder’s suits to calling an
extraordinary general meeting), it is hard to tell whether they succeed because
of public relations campaigns or because of the power of their legal rights.
In addition, the impact of media campaigns can be reduced by countervailing
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