Media Coverage of Corporate Governance Scandals and Stock Market Returns

Abstract

The media plays an important role in corporate governance (CG) as corporate monitors, especially for listed companies, by uncovering corporate malpractices to the knowledge of investors. In addition to being greeted with dumping their stocks in the markets, negative media attention damages managers’ and directors’ reputations, and can reduce the value of these individuals in the labor markets. Media attention on firms with weak CG can also drive politicians and regulators to enact legislation to reform or enforce corporate law. The latter is exactly the situation in the United States (US) where an immediate legislative response in the Sarbanes-Oxley Act in the wake of a number of large corporate frauds at the turn of the new millennium, such as the cases of Enron and Worldcom, which had shocked the investing community in the US as well as around the world. Some of these corporate frauds cases were in fact first discovered by the media well before regulators took actions to investigate into the cases. The share prices of these corporations plummeted as a result of media reporting. There is no exception for Hong Kong (HK), where media attention to large corporate frauds has also drawn negative sentiments from the investing public. Although the HK government and regulatory bodies did not respond with imposing dramatic reforms in securities or corporate laws to protect investors similar to the US, they are tightening the CG requirements on HK listed corporations in the recent decade similar to other governments around the world. Research on media attention on corporate frauds up to now focuses mainly on the US markets, but little is known about their effects on investors in Asia, particularly in HK, a major financial centre in the region and a primary capital market for mainland corporations to seek funding overseas in recent years. This study intends to fill this gap in the research. The research objective of this study is to investigate the impact of media coverage of CG scandals among HK listed companies on their stocks. The questions addressed in this study are whether the impact of media coverage of large corporate frauds on investors in HK is similar to that in the US in terms of magnitudes of the stock returns and stock volumes of these companies relative to those of the market as a whole? Whether this negative impact, if any, is short-term or long-term? What are the characteristics of these firms that may account for the greater impact on their stocks?