Strong local news, less corporate corruption

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This article was published 04/11/2021 (1780 days ago), so information in it may no longer be current.

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

The hand-wringing 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 — 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 per cent 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.

“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 behaviour. One good, the other not.

The local press could be an effective monitor, like the national press, by conducting investigations into potential business misbehaviour. 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.

The researchers compared that violation data in the three years after newspapers had closed with business violations in areas where newspapers remained open.

The disparity between the increase in violations and increase in fines (1.1 per cent vs. 15.2 per cent) showed businesses were less inclined to go bad in a bigger way when newspapers were around, according to the researchers.

“That’s more likely to show up in news articles,” said Pérez Cavazos, adding that minor violations typically receive little or no coverage.

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 behaviour, 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