Media coverage can impede business innovation by imposing short-term market pressures on managers, or by leaking crucial knowledge to rivals.
For this reason, it is important to understand how media coverage affects businesses’ long-term growth through innovation, says UNSW Business School Senior Lecturer Lili Dai.
His latest co-authored research paper Does the Media Spotlight Burn or Spur Innovation? sheds new light on media coverage’s impact on businesses' long-term growth ambitions.
“On average, we found a negative impact of news coverage on corporate innovation,” says Dr Dai, who explains that corporate innovation is one of the most important drivers of long-term growth for businesses'.
Using a comprehensive sample of business news coverage and patenting activities from 2000 to 2012, the study analysed US stocks listed on the New York Stock Exchange, American Stock Exchange and Nasdaq, while news coverage analysis came from the Dow Jones Newswires, The Wall Street Journal, Barron’s and MarketWatch.
Media coverage exerts a negative effect on firm innovation
The study’s baseline findings are consistent with the burning spotlight hypothesis that media coverage has a negative effect on businesses' innovation.
“We find that if companies receive more media attention, then they will have less patents granted, receive fewer citations of patents, and generate lower values from patents in the future,” says Dr Dai.
Further analyses show that the negative effect of media coverage on business innovation is stronger when the news reports are associated with a businesses' short-term performance and when investors are focused on short-term results.
This finding suggests that the business media may put pressure on managers to boost short-term performance targets at the expense of overlooking the long-term interests of their organisation.
Firms should focus on the long-term
“Besides the innovation outputs, we further find evidence for the impeding effect of media coverage extending to other firms’ long-term perspectives, leading to less research and development expenses, and lower growth of firms’ future cash flows,” says Dr Dai.
In contrast to the burning spotlight hypothesis, the authors also conjecture and find supportive evidence that the media can provide a potential solution to boost innovation.
For example, when the media generates more information through news coverage and qualifies information between managers and capital providers, businesses' will have an increase in access to capital with reduced financing costs.
The study’s findings are aligned with previous research conducted by Graham, Harvey, and Rajgopal (2005) who survey 401 chief financial officers (CFOs) in the United States.
Their study found that most CFOs are willing to sacrifice long-term value for short-term performance because they are pressured to meet short-term earnings targets, which are regularly covered and discussed by the business media.
Previous studies have found that media coverage can protect businesses’ cash flows because the media can play a monitoring role to help protect investors’ wealth and potentially reduce the cost of capital.
While the study conducted by Dr Dai and co-authors did find correlations between media coverage and reduced innovation, he says this inference may not be applicable to all businesses' in all markets.
“For each individual firm’s innovation policy, we still need to study the media effect on a case-by-case basis,” he says.
For more information, read Does the Media Spotlight Burn or Spur Innovation? co-authored with Rui Shen and Bohui Zhang, from The Chinese University of Hong Kong Shenzhen, School of Management and Economics and Shenzhen Finance Institute.