Political Relations and Media Coverage

We study the impact of political relations on media coverage. Using a sample of 3,290 American Depository Receipts (ADRs) from 45 countries, we find that poor political relations between the US and an ADR firm’s home country induce negative coverage by the US media of the ADR firm. To alleviate endogeneity, we adopt France’s and Germany’s opposition to the Iraq War and the inauguration of the US president as two shocks to bilateral political relations between the US and foreign countries. In placebo tests, we show either no negative effect of political relations on ADR firms’ press releases and non-US media coverage or such an effect not driven by firms’ US sales. We further document the three economic mechanisms underlying the impact of political relations on media coverage: US journalists’ country sentiment, a country’s popularity among US readers, and the US media’s political beliefs. Finally, we document the two consequences of negative coverage by the US media: investors respond to negative news in a short horizon but quickly adjust with a stock price reversion in a long horizon, and negative coverage leads to a higher likelihood of firms terminating their ADRs.