In the US, for example, it is the press that oversees the share-trading activities of corporate executives, says Zhang. The Securities and Exchange Commission requires executives – so-called "corporate insiders" – to disclose their activities when it comes to buying or selling the stock of their employers, which is then reported to the media.
Zhang and his team of researchers used data from more than 1.375 million trades by US executives to analyse these insiders' profits, earned during a 180-day window after a share transaction. Specifically, Zhang looked at whether insiders can reap abnormal profits when they are faced with news coverage.
Zhang calls the outcome "disciplining via dissemination", since the publication of the managers' trading decisions not only reduces the information gap between executive and public shareholder, it also limits opportunistic behaviour because the coverage makes executives acutely aware of potential litigation risk.
And last but not least, executives' equity-based compensation ties a great amount of personal capital to the firms employing them, hence news of illegal insider trading not only harms an executive's reputation but also his personal wealth. Overall, news coverage "significantly reduces the incidence of abnormal insider trading activities executed around earnings announcements", says Zhang.
Older studies on the corporate governance role of the media conducted by Alexander Dyck from the University of Toronto show that media exposure seems to "to work in part by impacting companies' reputations abroad and in part by forcing regulators into action".
But what if not only the corporations are state-owned but also a considerable part of the media? Can investors and the public then rely on prosecutors to do their duty? To find out, Zhang, of Chinese origin himself, turned to China where state-run and market-oriented business media co-exist; where corporate governance is weak due to a lack of transparency and political influence on state-owned corporations.
"In China, the role of business media is particularly important, since alternative sources to discipline management are rare," says Zhang.
His team of researchers looked at 80,008 articles of financial news between 2004 and 2010 from eight newspaper sources, four state-controlled ones (China Securities Journal, Securities Daily, Securities Times and Shanghai Securities Journal) and four market-oriented ones (China Business Journal, 21st Century Business Herald, The Economic Observer and First Financial Daily).
'Media may be the sheriff of the boardroom, but by imposing short-term pressure and inducing managerial myopia, the press also impedes firm innovation' – Bohui zhang
The researchers focused on top executive turnover – an aggressive and transparent reaction to corporate scandal and bad press. The outcome was that negative coverage by market-oriented media significantly increases the chance of forced top executive turnover, whereas similar coverage by the state-controlled media has no such impact.
Also "the disciplinary effect of the market-oriented media is stronger for companies that are less likely to be influenced by political capture, such as non-state-owned firms", explains Zhang.
For example, in 2008, Sanlu Group, one of the largest dairy producers in China, was selling baby formula contaminated with the industrial additive melamine, which made 294,000 babies ill and killed six infants.
Chinese journalists from the state-controlled media, however, were blocked from revealing this story by censorship edicts that prohibited coverage of sensitive subjects during the prelude to the Olympic Games, when Beijing's political priority was to host a "harmonious" Games.
News about the scandal surfaced only after the Games, when Lanzhou Morning Post, a market-oriented newspaper, blew the whistle.
"Business media can act as watchdog on behalf of shareholders, however, the effectiveness of media as a governance mechanism requires the independence of such media," says Zhang.
The press is not free
Most people in the West take independent media for granted, but in fact it is not. "Global press freedom fell to its lowest level in over a decade in 2013", write Karin Deutsch Karlekar and Jennifer Dunham in their essay, "Press Freedom in 2013: Media Freedom Hits Decade Low".
The researchers work for Freedom House, an organisation based in New York with the purpose of promoting the right to free expression throughout the world.
According to their findings, only 14% of the world's population receives information from potentially independent media because 30% of media firms around the world are directly controlled by governments, while the remaining market-oriented media firms are indirectly influenced by governments through content restrictions.
No choice but to react
Volker Wolff, former editor-in-chief of Germany's leading business weekly WirtschaftsWoche and professor of journalism at the Johannes Gutenberg University of Mainz, strongly stresses the role of regulators.
In Germany, it is mainly the strong arm of the law that keeps managers honest, insists Wolff, quoting court cases against individuals such as Thomas Middelhoff from the retail chain Arcandor who was sentenced to three years imprisonment last year for misappropriating corporate means, or the ongoing case against four executives of private bank Sal. Oppenheim for allegedly dubious property deals.
"Active public prosecutors have shaken up a lot of people in Germany, more than the power of the pen," says Wolff. But there is also plenty of empirical evidence that executives become wary of the media as soon as any misdemeanour is out in the open, according to Wolff.
"Studies have proven that after a corporate scandal the media starts to become particularly active, diligent and self-assured and that corporations have no choice but to react," he says
The innovation cost
According to Zhang, there is also a "dark side of news coverage". Empirical work using data for 2001-2012 shows a "negative relation between media coverage and innovation".
Constant attention by the press may keep a company's management honest – but also creates a certain risk awareness in the top ranks.
Corporations in the spotlight tend to focus on short-term gains to meet or beat analyst earnings forecasts, such as efficiency programs, the use of a new IT systems, and equity-based compensation rather than long-term investments in research and development.
"Media may be the sheriff of the boardroom", says Zhang, "but by imposing short-term pressure and inducing managerial myopia, the press also impedes firm innovation."