5 Questions with Jonas Heese: When Newspapers Close, Corporate Misonduct Goes Up

July 12, 2022

The circulation and readership of local newspapers in the United States has been steadily dropping since the 1990s, falling over 50% in the last 30 years. The reasons why have been well-documented: the internet, products like Craig’s List and Facebook that made classified listings all but obsolete, private equity firms buying and liquidating media properties and a global pandemic that further strained advertising revenue.

Why is this a problem? Because, as Harvard Business School Professor Jonas Heese found by analyzing data compiled in our Violation Tracker, local newspapers can be instrumental to not only exposing corporate misconduct, but seemingly in preventing it.

Heese wrote about the relationship for the Journal of Finance Economics. In When the local newspaper leaves town: The effects of local newspaper closures on corporate misconduct,” he finds that local paper closures are linked to a higher incidence of corporate misconduct violations, as well as an increase in their severity (as measured by penalty totals). Heese’s findings illustrate how local newspapers can act as effective watchdogs of corporations in their communities.

Heese, who is the Marvin Bower Associate Professor of Business Administration at Harvard Business School, answered my questions about the publication and the future of local newspapers via email from Boston:

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<p>Description automatically generated with medium confidenceQ:  Are small newspapers in particular effective at holding companies in their communities accountable, despite some of the challenges your report identifies (i.e. risking upsetting a potential advertiser or alienating readers that work at those companies)?

A: The starting point of my study was the question of whether local newspapers are effective watchdogs of local firms. On the one hand, local reporters might have better access to local information, allowing them to uncover violations of local firms. On the other hand, local newspapers typically rely on advertising income from local firms and their readers work at those companies. These conflicts of interest could lead reporters to avoid targeting local firms for investigative reporting. In addition, local newspapers often lack the resources to do in-depth investigative reporting. In fact, I was skeptical that local newspapers would be an effective watchdog of firms. 

Q: How did you structure your analysis?

A: To test the effect of local newspaper closures on local firm misconduct, I—together with two colleagues—examined changes in local firms’ misconduct before and after 33 local newspaper closures that impacted 45 U.S. counties. For this analysis, we used the data provided by Violation Tracker. In particular, we examined violations and penalties issued by 44 government regulatory agencies from 2000 to 2017. These violations relate to a wide variety of issues, including workplace safety, discrimination, pay practices, pollution, securities violations, or fraud against the government.

Q: In your paper, you find that after a local paper closes, businesses in that area start incurring higher violations and penalties for misconduct. Why is this?

A: We find that violations at local public companies rise by 1.1% and financial penalties by 15% after a local newspaper closed. Our findings suggest that firms engage in more severe misconduct after local newspapers close. Toxic emissions, which companies are required to report even when they are not illegal, increase by almost 20% after a newspaper folded. These effects are stronger for facilities that belong to firms with more media coverage and in areas that lost their one remaining local newspaper. Taken together, these findings indicate that local newspapers really play a watchdog role and discipline firms to comply with laws and regulations. When local newspapers disappear the reputational cost for engaging in misconduct is lower, as the broader public is less likely to learn about the misconduct.

Q: During your research, did you identify any other alternative mechanisms or organizations at the local level that monitor the behavior of companies?

A: Other parties outside of the firm, such as social media or non-profit organizations, could substitute for local newspapers. If these other parties could step up and monitor firms immediately, then we should not be able to see the increase in violations. However, given that we find an increase in local misconduct after a local newspaper closes, it seems that no other party takes over the watchdog role—at least in the short term.

That being said, in a follow-up study, I examine more systematically the question of whether social media can also serve as a watchdog of corporations. I find that firms indeed improve their compliance when local social media activity increases. The results from that study suggest that other forms of media can also deter firms’ violations of laws and regulations.

It is also important to keep in mind that managers typically want to improve compliance in their organizations—especially nowadays where compliance with environmental, social, and governance standards is crucial.

Q: The continued decline of local newspapers has been further exacerbated by the pandemic. Do you see a way forward for local news?

A: This is a very hard question, and a question I did not address in this study. That being said, it seems that there is a growing awareness of the cost to society when local newspapers disappear. Also, according to the report by Northwestern University, there is some reason to be hopeful. For example, some local news organizations are actually prospering, and various nonprofit organizations are experimenting with new financing and business models for local news with promising results.

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