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Why media attention can be an enemy of innovation

Analysis | 15 November 2017

Lili Dai

Associate Professor

Even positive coverage will undermine long-term thinking

Most businesses believe that appearing in the media is desirable. This may explain why public relations is such a fast growing industry – working to win media coverage for employers or clients.

Yet media attention doesn't always bring benefits to a business, even if the coverage is positive.

Lili Dai and Bohui Zhang from UNSW Business School, along with Rui Shen from Nanyang Technological University in Singapore, set out to test the effect of media exposure on the amount of innovation a firm produces and have published their findings in Does the media spotlight burn or spur innovation?

The authors looked at two competing effects of media coverage. First, they tested what they call the "spotlight-burning hypothesis". This is the idea that media coverage could harm innovation by putting market pressure on managers, which would in turn lead them to forgo the long-term interests of the business in order to boost short-term profits.

Previous academic research into US firms has already shown that a majority of chief financial officers are willing to sacrifice long-term value for short-term performance because they are pressured to meet short-term earnings targets.

According to the authors, "This managerial myopia can be exacerbated by the media."

They note that a news release announcing earnings for the current quarter or year attracts greater investor attention than a typically vague description of firms' long-run growth.

"Therefore, the media's sensational articles may primarily focus on firms' short-term performance instead of their long-term growth. Given that innovation is an output of long-term investment, the threat of media coverage can impede firm innovation."

'We found that if a firm receives more media attention then the firm will receive fewer citations of their patents and have a lower value of patents in the future'
LILI DAI

A potential solution

Weighed against the spotlight-burning hypothesis is what the authors call the "spotlight-spurring hypothesis", which suggests media coverage may boost innovation by helping firms raise the capital needed to fund it.

Innovative firms suffer more severely than other businesses from limited external financing because innovation is a long-term process that tends to exhaust internal capital and that entails uncertainty.

"The media provides a potential solution to this financial difficulty by conveying firms' inside information to the public and increasing managers' visibility and credibility," the authors note. "Both outcomes provide firms with increased access to capital and with reduced financing costs."

The media also has a role to play in encouraging managers to work more in the interests of their firm rather than in their own interests. Previous research has shown that when the market cannot observe the full spectrum of managerial actions, moral hazard will induce managers to shirk and avoid investment in innovative projects that are risky and effortful.

While media coverage has had both positive and negative effects on innovation, one outweighed the others, according to the authors.

"We found that if a firm receives more media attention then the firm will receive fewer citations of their patents and have a lower value of patents in the future," says Dai, a senior lecturer in the school of accounting at UNSW Business School.

"This baseline result suggests a negative correlation between the media and innovation."

Coverage and patents

To conduct the research, the authors looked at the corporate news coverage and patenting activities for US stocks listed on the NYSE, Amex, and Nasdaq between 2000 to 2012.

First, they considered how much media coverage a firm received in a particular year in outlets such as Dow Jones Newswires, The Wall Street Journal, Barron's, and MarketWatch.

They then compared the news coverage data with innovation data for two years later, to take into account that innovation is a long-term process. Specifically, they measured a firm's innovation outputs by using the number of citations per patent, the market value of ultimately successful patents filed by the firm in a year, as well as the number of patents.

They found a negative relation between media coverage and corporate innovation outputs. A one-standard-deviation increase in media coverage is associated with a 7% decrease in citations per patent, a 14.5% decrease in patent values, and a 3.6% decrease in patent counts.

The authors wondered if the effect was caused by poor fundamentals at the firm that could lead to negative news coverage and hence less investment in innovation. To test this, they split news coverage into positive coverage and negative coverage.

"We find that both positive news coverage and negative news coverage have a significantly negative impact on corporate innovation," they write.

They also found that the negative effect of earnings-related news coverage is stronger for firms with a larger proportion of short-term institutional investors, while the positive effect of financing-related news coverage is more pronounced for firms with greater financial constraints.

'Like it or not, there still seems to be a level of credibility attached to having appeared in well-known or authoritative media sources'
BENJAMIN CHONG

Instant gratification

Greg Bright, founder of IO&C, a media business that publishes specialist investor publications and also helps companies raise capital, isn't convinced that media attention can harm a firm's innovation outputs.

But he has no doubt that the media can prompt management into short-term thinking.

"What the media does is give you instant gratification," Bright says. "If you put something out in the media you will get an instant response and if that impacts on what should probably be a long-term program, then you shouldn't be swayed by short-term opinion."

He notes that a significant amount of innovation in Australia is undertaken by individuals or small firms which aren't listed on the share market, but says when a company does issue stock the media attention will have an even more profound effect on short-term thinking.

"The directors can become fascinated with the share price and how they can impact the share price with an announcement of some sort," Bright says.

Benjamin Chong founded technology venture capital firm Right Click Capital in 2003. It has invested in and worked with about 25 different companies, including DesignCrowd, hipages and Redback Technologies. Chong was also an e-commerce entrepreneur in the 1990s.

He believes media coverage can be helpful for firms in raising capital, because it makes businesses more credible.

"If it's been heard of before or someone has some level of recollection, that's helpful," Chong says. "Like it or not, there still seems to be a level of credibility attached to having appeared in well-known or authoritative media sources."

Distracting for start-ups

Chong also agrees that media coverage can crimp innovation, but for different reasons than those suggested in Dai and his colleagues' paper.

He notes that seeking media coverage and providing interviews can be very distracting for start-ups, which typically only have a handful of staff.

"I think there can be proverbial wheels spun and not enough effort being directed to the real innovation," Chong says.

"In my experience, to build something that is desirable and that has competitive advantage so that it's sticky over time, requires time and it requires a lot of trial and error."

There is also the risk that founders will believe too much of what is written about them in the media.

"In early stage businesses, if we believe too much of that, it can be detrimental because it is still about developing the product, ensuring the product fits what the market desires, and that your product is highly differentiated," Chong says.

Dai says the researchers didn't want to get into a debate about the merits of media coverage or how the media operates, but adds that the research demonstrates "the media is a two-sided sword".

"Sometimes it can improve firms' transparency and disclose information to outside investors," he says. "But if the media reports more short-term performance measures, the managers will face more pressures from the public and make them focus more on short-term earnings targets."

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<h1>Why media attention can be an enemy of innovation</h1>

<figure><img src="https://assets-us-01.kc-usercontent.com:443/4df0558d-5779-0012-00f2-b3fa06d6c950/f505efe1-e5be-4bf7-95a9-4ec08e81665f/iStock-188119871.jpg?w=1320" alt="media scrum" /><figcaption>media scrum</figcaption></figure>
 Most businesses believe that appearing in the media is desirable. This may explain why public relations is such a fast growing industry – working to win media coverage for employers or clients.
Yet media attention doesn't always bring benefits to a business, even if the coverage is positive.
Lili Dai and Bohui Zhang from UNSW Business School, along with Rui Shen from Nanyang Technological University in Singapore, set out to test the effect of media exposure on the amount of innovation a firm produces and have published their findings in <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3037838">Does the media spotlight burn or spur innovation?</a>
The authors looked at two competing effects of media coverage. First, they tested what they call the "spotlight-burning hypothesis". This is the idea that media coverage could harm innovation by putting market pressure on managers, which would in turn lead them to forgo the long-term interests of the business in order to boost short-term profits.
Previous academic research into US firms has already shown that a majority of chief financial officers are willing to sacrifice long-term value for short-term performance because they are pressured to meet short-term earnings targets.
According to the authors, "This managerial myopia can be exacerbated by the media."
They note that a news release announcing earnings for the current quarter or year attracts greater investor attention than a typically vague description of firms' long-run growth.
"Therefore, the media's sensational articles may primarily focus on firms' short-term performance instead of their long-term growth. Given that innovation is an output of long-term investment, the threat of media coverage can impede firm innovation."
<blockquote>'We found that if a firm receives more media attention then the firm will receive fewer citations of their patents and have a lower value of patents in the future' LILI DAI</blockquote>
<h4>A potential solution</h4>
Weighed against the spotlight-burning hypothesis is what the authors call the "spotlight-spurring hypothesis", which suggests media coverage may boost innovation by helping firms raise the capital needed to fund it.
Innovative firms suffer more severely than other businesses from limited external financing because innovation is a long-term process that tends to exhaust internal capital and that entails uncertainty.
"The media provides a potential solution to this financial difficulty by conveying firms' inside information to the public and increasing managers' visibility and credibility," the authors note. "Both outcomes provide firms with increased access to capital and with reduced financing costs."
The media also has a role to play in encouraging managers to work more in the interests of their firm rather than in their own interests. Previous research has shown that when the market cannot observe the full spectrum of managerial actions, moral hazard will induce managers to shirk and avoid investment in innovative projects that are risky and effortful.
While media coverage has had both positive and negative effects on innovation, one outweighed the others, according to the authors.
"We found that if a firm receives more media attention then the firm will receive fewer citations of their patents and have a lower value of patents in the future," says Dai, a senior lecturer in the school of accounting at UNSW Business School.
"This baseline result suggests a negative correlation between the media and innovation."
<h4>Coverage and patents</h4>
To conduct the research, the authors looked at the corporate news coverage and patenting activities for US stocks listed on the NYSE, Amex, and Nasdaq between 2000 to 2012.
First, they considered how much media coverage a firm received in a particular year in outlets such as Dow Jones Newswires, The Wall Street Journal, Barron's, and MarketWatch.
They then compared the news coverage data with innovation data for two years later, to take into account that innovation is a long-term process. Specifically, they measured a firm's innovation outputs by using the number of citations per patent, the market value of ultimately successful patents filed by the firm in a year, as well as the number of patents.
They found a negative relation between media coverage and corporate innovation outputs. A one-standard-deviation increase in media coverage is associated with a 7% decrease in citations per patent, a 14.5% decrease in patent values, and a 3.6% decrease in patent counts.
The authors wondered if the effect was caused by poor fundamentals at the firm that could lead to negative news coverage and hence less investment in innovation. To test this, they split news coverage into positive coverage and negative coverage.
"We find that both positive news coverage and negative news coverage have a significantly negative impact on corporate innovation," they write.
They also found that the negative effect of earnings-related news coverage is stronger for firms with a larger proportion of short-term institutional investors, while the positive effect of financing-related news coverage is more pronounced for firms with greater financial constraints.
<blockquote>'Like it or not, there still seems to be a level of credibility attached to having appeared in well-known or authoritative media sources' 
BENJAMIN CHONG</blockquote>
<h4>Instant gratification</h4>
Greg Bright, founder of IO&C, a media business that publishes specialist investor publications and also helps companies raise capital, isn't convinced that media attention can harm a firm's innovation outputs.
But he has no doubt that the media can prompt management into short-term thinking.
"What the media does is give you instant gratification," Bright says. "If you put something out in the media you will get an instant response and if that impacts on what should probably be a long-term program, then you shouldn't be swayed by short-term opinion."
He notes that a significant amount of innovation in Australia is undertaken by individuals or small firms which aren't listed on the share market, but says when a company does issue stock the media attention will have an even more profound effect on short-term thinking.
"The directors can become fascinated with the share price and how they can impact the share price with an announcement of some sort," Bright says.
Benjamin Chong founded technology venture capital firm Right Click Capital in 2003. It has invested in and worked with about 25 different companies, including DesignCrowd, hipages and Redback Technologies. Chong was also an e-commerce entrepreneur in the 1990s.
He believes media coverage can be helpful for firms in raising capital, because it makes businesses more credible.
"If it's been heard of before or someone has some level of recollection, that's helpful," Chong says. "Like it or not, there still seems to be a level of credibility attached to having appeared in well-known or authoritative media sources."
<h4>Distracting for start-ups</h4>
Chong also agrees that media coverage can crimp innovation, but for different reasons than those suggested in Dai and his colleagues' paper.
He notes that seeking media coverage and providing interviews can be very distracting for start-ups, which typically only have a handful of staff.
"I think there can be proverbial wheels spun and not enough effort being directed to the real innovation," Chong says.
"In my experience, to build something that is desirable and that has competitive advantage so that it's sticky over time, requires time and it requires a lot of trial and error."
There is also the risk that founders will believe too much of what is written about them in the media.
"In early stage businesses, if we believe too much of that, it can be detrimental because it is still about developing the product, ensuring the product fits what the market desires, and that your product is highly differentiated," Chong says.
Dai says the researchers didn't want to get into a debate about the merits of media coverage or how the media operates, but adds that the research demonstrates "the media is a two-sided sword".
"Sometimes it can improve firms' transparency and disclose information to outside investors," he says. "But if the media reports more short-term performance measures, the managers will face more pressures from the public and make them focus more on short-term earnings targets."

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