Column: Corporate misconduct increases after local newspapers shut down, study says

The shutdown of local newspapers across the country over the years has come with concerns about how officials would behave if the community watchdog did not look over their shoulders.

The hand wringing is justified. Studies have shown that public corruption and taxpayers’ costs increased after newspapers were closed.

But research into the impact of newspaper closures on local businesses has been limited, and the results of the studies conducted have been mixed. A new report draws more definite conclusions.

A statewide study published earlier this year, co-authored by a professor at UC San Diego, found that corporate violations rose and fines increased as local newspapers went away. The higher fines suggest companies have been more courageous in breaking the law.

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

The study – “When the Local Newspaper Leaves Town: The Impact of Local Newspaper Closures on Corporate Misconduct” – said violations increased by 1.1 overall. Percent, while fines rose 15.2 percent.

The researchers found a wide range of increased violations of, among other things, securities, environmental, consumer protection and occupational safety laws.

“Our study thus provides a comprehensive analysis of the impact of local newspapers on corporate misconduct,” says the report, which was also written by Jonas Heese from Harvard Business School and Caspar David Peter from the Rotterdam School of Management.

Because the study was of known violations, the researchers also indicated that there was likely a greater increase in undetected violations that would have resulted in more fines if detected.

The study, citing research by the Pew Research Center, said the circulation of local newspapers in the United States had decreased by 50 percent in two decades by 2019. However, the study looked at communities where news organizations actually stopped and did not include mergers, reduced frequency of posting, or switching to purely online, as this does not necessarily affect the availability of local news.

The researchers also looked at other potential factors behind the rise in corporate crime.

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

Increased enforcement was also included in the analysis. For example, the study found that the number of workplace violations increased significantly from 2006 to 2007 following several initiatives by the Occupational Safety and Health Agency to tackle workplace safety violations.

This trend was evident across the study sample, which included areas with closed newspapers and areas with open newspapers that served as the control group. Pérez Cavazos said she had not seen an increase in inspections specifically in communities where a newspaper had closed.

In addition, the authors said their findings were not the result of any particular type of crime.

“Taken together, our results show that local newspapers are an important monitor for corporate misconduct,” the authors write.

The researchers suggested two views on the influence of newspapers on corporate behavior. One is good, the other is not.

The local press, like the national press, could be an effective monitor by investigating potential corporate misconduct. Local newspapers would benefit from their proximity to local sources such as employees and suppliers. Their coverage would be disseminated throughout their region and possibly picked up by the national media.

On the other hand, they suggested that local newspapers might have incentives to avoid or neglect reporting on local businesses. These companies are often the source of advertising revenue. Negative stories about companies could also annoy employees who might be readers and decide to stop subscribing.

Meanwhile, smaller newspapers may lack the resources to conduct significant research and may be limited in scope, diminishing their effectiveness as monitors of local businesses.

Quoting previous reports, the study found “mixed” or “ambiguous” results about the effectiveness of local newspapers’ watchdog role in relation to businesses. The researchers added that studies of the decline of the news media and public officials and agencies did not.

“. . . Previous studies show that areas with less local press have less informed voters and increased corruption from local politicians and borrowing costs for local governments. . . “, It says in the study.

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

“The cost of bonds can rise by up to 11 basis points after a local newspaper closes – a result that cannot be attributed to other economic conditions, say the authors. These civil watchdogs make a difference to the bottom line, ”said CityLab.

The report, co-authored by Pérez Cavazos of UCSD, examined almost 26,500 violations by more than 1,380 listed companies in around 10,000 locations between 2000 and 2017.

The researchers compared these violations in the three years after the newspapers closed with business violations in areas where newspapers were kept open.

The discrepancy between the increase in violations and the increase in fines (1.1 percent versus 15.2 percent) showed, according to the researchers, that companies were less likely to go wrong on a larger scale when there were newspapers.

“It’s more likely to appear in news articles,” said Pérez Cavazos, adding that minor violations tend to receive little or no treatment.

With that in mind, media coverage can discourage companies from committing larger crimes, which not only avoids hefty fines – which would likely be passed on to consumers – but also damages their reputations.

The decline of the newspapers has been widely documented along with the potential impact on society. Now there is a report that quantifies how this affects business behavior, as previous studies of public officials have done.

In the end, all of this research justifies one simple idea: support your local news organizations.