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    How Newspaper Closures Open the Door to Corporate Crime
    Research & Ideas
    How Newspaper Closures Open the Door to Corporate Crime
    08 Oct 2021Research & Ideas

    How Newspaper Closures Open the Door to Corporate Crime

    by Avery Forman
    08 Oct 2021| by Avery Forman
    A study of misbehavior among publicly traded companies illustrates the critical watchdog role that newspapers play, and the problems that arise when publications go out of business. Research by Jonas Heese.
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    Some may shrug at the inevitable passing of the local newspaper, writing it off as a dinosaur that doesn’t have much to offer in our modern world of blogs, social media sites, and streamed soundbites.

    But no news is not necessarily good news for society as a whole, says Harvard Business School Professor Jonas Heese. When local newspapers shutter, some businesses evidently treat the lack of press coverage as permission to act badly and end up committing more illegal violations, including pollution, workplace safety infractions, and financial fraud, according to Heese’s research.

    In a study of thousands of facilities of publicly listed firms, Heese identified the towns where the local newspaper presses permanently came to a halt. Heese found that after a newspaper shuts down, violations at publicly listed companies in the paper’s circulation area increased by 1.1 percent and penalties from regulators rose by 15 percent. He also found that the nature of many violations was more severe in towns without newspapers.

    “If you can do whatever you want and no one is looking, you’re more likely or more willing to engage in fraud,” says Heese. “If the local media doesn’t make a fuss, you can pay the penalty to regulators without it affecting your reputation.”

    The paper, When the Local Newspaper Leaves Town: The Effects of Local Newspaper Closures on Corporate Misconduct, confirms that the press serves as a watchdog and keeps businesses in check. Heese, the Marvin Bower Associate Professor of Business Administration at Harvard Business School, teamed up with Gerardo Perez-Cavazos at the University of California San Diego’s Rady School of Management and Caspar David Peter at the Rotterdam School of Management to conduct the research.

    Without newspapers, companies commit serious violations

    Heese, who researches corporate misconduct, decided to examine company violations in light of the rapid deterioration of the newspaper industry. The circulation of local newspapers in the United States has declined by roughly half within the past 20 years, and many papers have shuttered.

    To study the effect local press coverage has on firm behavior, Heese relied on Violation Tracker, which traces corporate violations and penalties from 44 federal regulatory agencies. The team looked at 26,450 violations at more than 10,000 local sites of 1,383 publicly listed companies, representing 80 percent of Fortune 100 firms, from 2000 to 2017. The database contains the location of each violation, allowing Heese and his colleagues to overlay that data both in areas where local newspapers were operating and in other areas where they had closed.

    The researchers studied the change in the number of violations, as well as the dollar amount of penalties, at firms’ local facilities after a local newspaper folded and compared those figures with a control group in an area where a newspaper continued to publish.

    The spikes in violations and penalties in paperless towns were economically significant, Heese says, representing a roughly $30,000 increase in penalties or 1 percent of a local facility’s sales, on average. Given that the average newspaper closure affects about 41 facilities, the closure of a local newspaper increases penalties by approximately $1.2 million over three years, the research shows.

    The results also suggest that when firms felt they could get away with something, they went big, Heese explains. The severity of the violations companies committed after newspapers vanished was more alarming than the increased volume, he says. And, because the data only captures wrongdoings that are detected, the real figures are likely higher, he notes.

    In their statistical models, Heese and his colleagues controlled for variables like local economic conditions and the local fraud environment and found that their results held up against those checks.

    Protecting corporations from themselves

    Heese initially expected to find that small-town newspapers are beholden to local market forces—that they may refuse, for example, to blow the whistle on the town’s biggest employer. Plus, he figured newspapers may not be willing to shed light on fraud when they rely on the perpetrators for ad revenue.

    Instead, the research findings contradict this notion, offering validation that the press is keeping vigilant watch and is exercising the fundamental rights assigned to them by the US Constitution. “I was surprised to see that newspapers really do have that monitoring role,” he says.

    Heese’s work implies that the possibility of media coverage may actually discourage corporate officials from the temptation to skirt the rules—tamping down everything from multimillion-dollar frauds to toxic emissions and minor safety violations. And this may protect them from facing fines and reputational costs.

    Saving local newspapers isn’t Heese’s specialty, but he points to a recent trend of hedge funds buying up distressed local media outlets as having the potential to stabilize the market and resurrect local news. And that makes him wonder: “Is this a reason to be hopeful?”

    About the Author

    Avery Forman is a writer based in the Boston area.
    [Image: Unsplash/Clay Banks]

    What would it take to support local news organizations?

    Share your thoughts in the comments below.

    Post A Comment
    In order to be published, comments must be on-topic and civil in tone, with no name calling or personal attacks. Your comment may be edited for clarity and length.
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    Marvin Bower Associate Professor
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