ed by countervailing
public relations efforts exerted by firms.
To overcome these problems we study shareholders’ ability to influence coverage
and the impact of this coverage on corporate governance by studying the
case of Russia over the 1999 to 2002 period. Russia presents a useful laboratory
setting for this analysis for several reasons. First, during the late 1990s, corporate
governance violations in Russia were very extreme, very common, and
very visible, providing an ample field of inquiry.
Second, over the 1999 to 2002 period, the standard mechanisms to address
these violations were either nonexistent or completely ineffective (e.g., courtswere easily corruptible in Russia), allowing us to identify whether media havean independent effect on outcomes.
Third, and most important, in Russia there exists an investment fund (the
Hermitage Fund) with extremely low turnover that consciously played a mediastrategy after the 1998 Russian crisis. In the words of its chairman Bill Browder,
“Our basic approach is to thoroughly research and understand where the
corporate malfeasance is taking place and then go to great pains to simplify thestory so the average person can understand what is going on. We then sharethe stories with the press. By doing so, we want to inflict real consequences—business, reputational and financial” (Dyck (2002), p. 9). Since the Hermitage
Fund spends resources only when it has money at stake, we can use the Hermitage’s
portfolio composition as an instrument for news coverage.
Fourth, during our sample period, Russian managers were just learning
about the impact of the press and were unlikely to factor into their decisionsthe reputational cost the media could impose.
Last but not least, in Russia there was a major regime shift at the time of theRussian default, when the level of corporate governance violations exploded.This regime shift makes it unlikely that the pre-default stake of Hermitage(which we use as an instrument) was chosen with a media strategy in mind,eliminating the risk of reverse causality.
Besides its role as an ideal laboratory setting, the study ofalternative mechanismsof corporate governance in an emerging market like Russia is of independentinterest. The fraction of pension money invested in emerging markets withunformed legal systems (like China) is growing rapidly. But Western investorsoften find themselves at a loss in these markets, where most of the U.S.-type ofinstitutional checks and balances do not work. Hence, our study of an effectivealternative corporate governance mechanism can be of great practical interest.To identify a sample of potential corporate governance violations we exploit
the fact that a prominent Russian investment bank, Troika Dialog, produced aweekly publication between 1998 and 2002 that highlighted all the corporate actionsthat, in their view, had the potential to severely impact outside investors’The Corporate Governance Role of the Media 1095
rights. This definition of potential violation does not necessarily imply that anyRussian law was infringed.2 Take, for instance, Tomskneft’s dilutive equity issuein 1999. The issue was approved by shareholders present at the meeting.But very few were able to be present because on the day of the meeting the company
announced that the venue had been transferred to a new distant location
that shareholders could not possibly reach in time to vote on the proposal
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