The Threat of Media Coverage and Corporate Labor Investment Decisions

The media characterizes actions taken by corporate managers and disseminates information about these actions to its audience. As such, the media can potentially have a significant effect on the public perceptions of firms and managers. We propose that for corporate investment decisions that are likely to draw significant media interest (i.e., labor), the threat of media coverage can act as a friction that hampers efficient investment. We develop a new measure of media coverage threat using the geographical distance between the firm and media outlets, and find that such a threat leads to increases in abnormal net hiring, measured as the absolute deviation from optimal net hiring predicted by economic fundamentals. In terms of the specific nature of labor investment inefficiency, we find firms subject to a higher threat of media coverage underinvest in labor by hiring less than the predicted number of employees, which preempts the need for highly publicized layoffs. The negative effects of the media on labor investment efficiency are more pronounced for firms that lack the ability to positively influence media coverage through advertising expenditures, smaller firms, and firms with a larger retail investor base. Overall, these findings suggest that the media can serve as a friction in, rather than a facilitator or monitor of, firms’ capital allocation decisions.