Friends in media: Implications of media connections for analyst forecast optimism

Abstract

We investigate the effect of corporate executives' connections with financial media on analyst forecast optimism. Some studies document that managers use their connections to benefit the firm. Alternatively, other studies show that managers use their connections to benefit themselves at the expense of the firm. Thus, it is difficult to predict ex-ante whether executives use their media connections to enhance information efficiency or distort information environment. We propose two hypotheses on the impact of financial media connections: information efficiency and manipulation. We estimate managerial media connection by using the BoardEx database, and apply standard OLS regression, mediation analysis, propensity score matching, 2-SLS instrumental variable regressions, and difference-in-difference regressions to test the two alternate hypothesis. Consistent with the manipulation hypothesis, our results suggest that corporate executives use media connections to exacerbate analyst forecast optimism. Mediation analysis suggests that media connections are related to not only more news coverage but also more positive news sentiment. We further find that managerial incentives and board monitoring moderates the relationship between media connections and analyst forecast optimism. Our study makes several contributions to academic literature and is interesting to regulators and investors. As corporate executives tend to exploit their friendship with the media to achieve enhanced analyst forecast optimism, it would have a negative impact on the efficiency of the capital markets. Our results suggest that regulators and investors should more closely scrutinize the social ties of corporate executives.