How big a role does the media play in keeping companies honest?

According to some academics, it plays an important function. Professor Alexander Dyck from the University of Toronto presented a paper at a Wharton conference examining the role the media played in Russia when they exposed executives at oil giant Gazprom milking the company.

The researchers say the findings also apply to the developed world. Articles in The Wall Street Journal and Financial Times highlighting corporate governance violations can hurt the company, diluting the value of equity by as much as 57 per cent. They can also force directors to have a rethink. Witness the way they had a change of heart following the revelations in the media about former New York Stock Exchange chief Richard Grasso's compensation package.

Still, the picture is a lot more complicated than that. In developed economies, corporations have armies of public relations teams. Strong relationships can develop and, as a result, corporate governance problems or accounting shenanigans are either overlooked or treated as minor news items. Also, the journalists talk to analysts and if the company works over the analysts, it flows on to the media which will report what the analysts tell them.

This is not to say that the media does not play an important. It's just that the situation is often not that clear cut.

Indeed, just how hazy it can be is revealed in a paper Are Cover Stories Effective Contrarian Indicators?.

The researchers looked at more than 500 cover stories in BusinessWeek, Fortune and Forbes between 1983 and 2002. They studied the share price performance for featured companies two years before and after they appeared in print. Each story was classified as positive, neutral or negative. That way, the professors could see if, for example, positive stories brought about a rise in share price or presaged problems ahead.

What they found was that companies featured in positive stories subsequently no longer outperformed their industry peers. But companies that were subjected to negative press tended to improve their operating performance in the period after the story. In other words, they had bottomed out.

But in terms of share price performance, stories, either positive or negative, weren't good predictors of which way the shares were heading. The professors advice? "We conclude that if an investor is short the stock of a company that is the subject of a negative cover story, the publication of the story indicates it is time to cover the short position because the stock has hit bottom."

Interesting findings. If nothing else, the study shows that the relationship between companies and media in terms of corporate governance, performance and share price is a complex beast.