Managing conflicts of interest in the financial media: Evidence from a natural experiment in China

This paper examines the effect of media regulation aimed at curbing the media’s conflict of interest on news reporting quality and its capital market consequences. Exploiting the large-scale merger and revocation of local reporter stations of Chinese central media outlets as a shock, we document a significant improvement in news reporting quality following the regulation of reporter stations in the province where the firms are located. Cross-sectional analyses show that the effect is stronger when the reporters are ex ante more susceptible to conflicts of interest (i.e., when covering a less transparent firm or stationed farther away from the headquarters, or when the media has closer business relations with the firm). Additionally, after the regulation, the coverage of the treated media is more effective in exposing and raising regulatory awareness of financial fraud, reducing accounting information manipulation, and enhancing market efficiency, consistent with an improvement in firm information environment when covered by media with greater editorial independence. The paper contributes to the research on media in the capital market, and has important practical implications for the healthy development of media outlets.