The Bubble and the Media

Most of the research in comparative corporate governance has, implicitly or explicitly, taken the US as benchmark. But recent corporate scandals, such as Enron and Worldcom, question this alleged supremacy. What went wrong? In this chapter we claim that the problem is not just lack of appropriate disclosure or legislation, but a more fundamental one: deficient incentives for the media to expose poor governance practices. We argue that corporate reporters have strong incentives to enter into a quid pro quo relationship with their sources, where they receive private information in exchange for a positive spin on companies’ news. Since the value of this relationship is higher during booms, so, too, will the pro-company bias. We find evidence in support of this hypothesis by looking at Harvard Business School case studies. We thank Mark Bradshaw, Bruce Kogut, David Moss, Forest Reinhardt and Julio Rotemberg for helpful discussions. We also gratefully acknowledge financial support from the Division of Research, Harvard Business School, the Center for Research on Security Prices and the George Stigler Center at the University of Chicago.