Stop the Presses! Or Wait, We Might Need Them: Firm Responses to Local Newspaper Closures and Layoffs

Abstract

The newspaper industry has struggled in recent decades, as readers and marketing revenue have migrated to digital outlets. Facing these pressures, many US newspapers have downsized or closed completely. We examine changes in firm behavior after they experience a shock to the local newspaper industry. Compared to a sample of matched control firms, we find that following newspaper closures and large industry layoffs, nearby public companies react by (1) increasing voluntary disclosure, consistent with firms responding to an increased demand for their information, and (2) increasing dividend payouts, consistent with firms attempting to alleviate concerns about agency problems exacerbated by the loss of a local watchdog. Cross-sectional analyses confirm that these results are driven by geographically-concentrated firms that rely more heavily on local newspapers to create and disseminate information about them to the public. We match treatment and control firms on both firm and local economic characteristics to mitigate concerns that differences between the two groups are driven by changes between local economies. Finally, we observe no change in either the financial reporting quality or performance of treatment firms, relative to control firms, in the post period, suggesting that the changes we document to payout and disclosure policy are not driven by changes in firm performance or firms’ accounting choices.