Negative Media Coverage And Regulatory Penalties

The capital market has played an indispensable role in promoting resource allocation and improving the efficiency of resource allocation.On April 29,2022,General Secretary Xi Jinping proposed the economic development requirements of "preventing the epidemic,stabilizing the economy,and ensuring safety" at a meeting of the Political Bureau of the Communist Party of China Central Committee,which posed new challenges for the healthy and orderly development of the capital market.On September 10,2022,the China Securities Regulatory Commission issued inspection and rectification opinions,clearly stating that it will further strengthen financial risk prevention and control,comprehensively enhance regulatory capabilities,and improve the risk prevention and resolution institutional mechanisms that cover all areas and links of the capital market,and enhance foresight,response,and disposal capabilities.Combating illegal securities activities is an important guarantee for maintaining the order of the capital market and effectively playing the hub function of the capital market.This is of great significance for deepening the supply-side reform of finance,improving a modern financial system that is highly adaptable,competitive,and inclusive,and maintaining national economic and financial security.The changes in the media environment have altered the way in which securities regulatory agencies obtain information on companies’ violations.Various types of media,especially online media,may directly provide clues to a company’s violations,and the public opinion pressure generated by media reports on companies may also prompt regulatory agencies to investigate.In the widely known case of Kangmei Pharmaceutical,according to the statistics of the People’s Daily Online Opinion Data Center,from April 29 to May 20,2019,a total of 10,914 pieces of public opinion information on this topic were monitored,with online media having the highest dissemination volume and news clients and We Chat ranking second and third,respectively.During the monitoring period,the attention to public opinion fluctuated and rose repeatedly,prompting the stock exchange to issue two inquiry letters on matters related to the case within a week.Subsequently,on May 17,the China Securities Regulatory Commission swiftly issued a preliminary announcement stating that Kangmei Pharmaceutical had made significant false statements in its financial reports from2016 to 2018.It can be seen that the media played a unique role in promoting the regulatory process of the China Securities Regulatory Commission in the "Kangmei case." However,few scholars have directly studied the impact of media reporting itself and changes in the media environment on capital market regulation in existing academic research.This paper examines the early warning effect of negative media coverage on regulatory penalties for non-financial A-share listed companies.The study found that the more negative media coverage a company receives,the higher the probability of being penalized by regulators the following year.Additionally,in years when print media dominates,print media has a stronger early warning effect,while in years with higher levels of development of online media,online media has a stronger early warning effect and the early warning effect of print media is not significant.Mechanism testing found that negative media coverage plays a role in revealing a company’s violations through information transmission mechanisms and public opinion pressure mechanisms.Further analysis revealed that negative coverage related to securities market environment,company investment and financing,accounting information quality,management-related coverage,asset restructuring,and compliance coverage have a stronger early warning effect on regulatory penalties.Negative coverage by state media representing the government’s attitude and non-state media representing market sentiment both have an early warning effect.Companies that receive inquiry letters and negative media coverage are more likely to be penalized by regulatory authorities.Negative media coverage has an early warning effect on all four types of regulatory penalties.In addition,the paper examined the long-term effect of negative media coverage on regulatory penalties and found that the effect of print media lasts only one year,while the effect of online media lasts for two years.The conclusions of this study enrich the literature on the early warning effect of media coverage on violations in the capital market,and provide direct empirical evidence for the link between negative media coverage and regulatory penalties.This paper has two potential marginal contributions: Firstly,although existing literature has found that media coverage plays a positive governance role in many aspects of listed company governance,such as management governance,audit quality governance,and corruption governance,only a few scholars have studied the predictive role of negative media coverage on regulatory penalties.This paper fills this gap by identifying the predictive role of negative media coverage,enriching the literature on the governance role of media coverage in capital markets.Secondly,with the natural evolution of media forms,the form of information dissemination has gradually shifted from print media to online media.This paper investigates whether regulators as individuals are affected by this media shift.Interestingly,this paper finds that in years where print media is dominant,negative coverage in print media is more likely to draw the attention of regulatory agencies.However,when online media is more developed,negative coverage in online media is more likely to attract regulatory attention,and the predictive role of print media is not significant.This finding contributes to the academic literature by providing insight into the impact of media shift on regulatory response.