Corporate misconduct increases after local newspapers shut down, says study

by Michael Smolens

The closure of local newspapers across the country over the years has been coupled with concern about how public officials would behave without the community watchdog looking over their shoulders.

The handwringing has been justified. Studies have shown that public corruption and taxpayer costs have increased after newspapers were shuttered.

But there was sparse research on the impact of newspaper closures on local corporations, and the results of studies that had been done were mixed. A new report draws more definitive conclusions.

A nationwide study co-authored by a UC San Diego professor published this year says that legal violations by corporations increased and the fines they were assessed spiked when local newspapers went away. The larger fines suggest companies had become bolder in breaking the law.

“When local newspapers closed down, the response was companies did misbehave in that way,” said Gerardo Pérez Cavazos, a professor at the UCSD Rady School of Management who specializes in corporate misconduct and corporate governance.

The study — “When the local newspaper leaves town: the effects of local newspaper closures on corporate misconduct” — said overall violations went up 1.1% while fines increased by 15.2%.

The researchers found a broad array of increased violations involving securities, environmental, consumer protection and workplace safety laws, among others.

“Thus, our study provides a comprehensive analysis of the effect of local newspapers on firms’ misconduct,” said the report, which was also authored by Jonas Heese of the Harvard Business School and Caspar David Peter of the Rotterdam School of Management.

Given the study involves known violations, the researchers also suggested there likely was a greater increase in undetected violations that, if uncovered, would have resulted in more fines.

The study, citing research by the Pew Research Center, said circulation of local newspapers in the United States had decreased by 50% over two decades as of 2019. But the study looked at communities where the news organizations actually ceased, and did not include mergers, reduced frequency of publication or change to online-only because that doesn’t necessarily affect local news availability.

The researchers also looked at other potential factors for the increase in corporate malfeasance.

“This effect is not driven by the underlying economic conditions, the underlying local fraud environment, or the underlying firm conditions,” the study said.

Enhanced enforcement also was factored into the analysis. For example, the study noted the number of workplace violations increased substantially from 2006 to 2007 after several initiatives by the Occupational Safety and Health Administration to crack down on job-site safety violations.

That trend appeared across the study’s sample that included areas with closed newspapers and areas where newspapers remained open, which served as the control group. Pérez Cavazos said they did not see an increase in inspections specifically in communities where a newspaper had closed.

Further, the authors said their findings were not the result of any particular type of offense.

“Taken together, our findings indicate that local newspapers are an important monitor of firms’ misconduct,” the authors wrote.

Going in, the researchers suggested two views of newspapers’ impact on corporate behavior. One good, the other not.

The local press could be an effective monitor, like the national press, by conducting investigations into potential business misbehavior. Local newspapers would benefit from their proximity to local sources such as employees and suppliers. Their reporting would be disseminated throughout their region and possibly be picked up by the national media.

On the other hand, they suggested local papers may have incentives to avoid or slant reporting on local firms. Those companies often are the source of advertising revenue. Also, negative stories about businesses could upset employees, who may be readers and decide to drop their subscriptions.

Meanwhile, smaller papers may not have the resources to conduct significant investigations and may be limited in their reach, reducing their impact as a monitor of local business.

The study cited previous reports and found “mixed” or “ambiguous” results about the effectiveness of the local newspapers’ watchdog role when it came to companies. The researchers added that hasn’t been the case with studies about the demise of news media and public officials and agencies.

“… [P]rior studies show that areas with less local press have less informed voters and increased corruption by local politicians and borrowing costs for municipalities … ” the study says.

Bloomberg CityLab cited one study that concluded disruptions in local news coverage are often followed by higher long-term borrowing costs for cities.

“Costs for bonds can rise as much as 11 basis points after the closure of a local newspaper — a finding that can’t be attributed to other underlying economic conditions, the authors say. Those civic watchdogs make a difference to the bottom line,” according to CityLab.

In that sense, media coverage may discourage companies from committing larger crimes, which not only can avoid big fines — that likely would be passed on to consumers — but damage to their reputations.

The decline of newspapers has been widely chronicled along with the potential impacts on society. Now there’s a report quantifying how that affects business behavior, as earlier studies did regarding actions by public officials.

In the end, all this research justifies a simple notion: Support your local news organizations.

 Michael Smolens is a columnist for the San Diego Union-Tribune