In This Story
Digital disruption can claim many casualties, from the landline telephone and fax machine to compact discs and encyclopedias. But not all of these can be casually chalked up to the march of progress.
Consider the local newspaper. Since 2005, the United States has lost one-third of its remaining newspapers, with outlets shuttering at a rate as high as two per week. Between 2008 and 2020, U.S. newsroom employment fell by more than one-quarter, to a vanishingly small 85,000.
To be sure, journalism continues, through blogs, news websites and even social media. So should we care about the fate of this particular institution, the community newspaper? Recently published research by Joseph (Han) Stice, assistant professor of accounting at the Donald G. Costello College of Business, suggests that the decline of community newsrooms affects local economies in ways that warrant widespread concern.
This paper, forthcoming in Contemporary Accounting Research, was co-authored by Zhiming Ma (Peking University), Derrald Stice (University of Hong Kong), and Yue Zhang (Central University of Finance and Economics). Its core contribution hinges upon community-level comparisons of bank loan contracts before and after the closure of a nearby newspaper. The data-set comprised 6,482 loans issued to corporate borrowers headquartered within 50 miles of a closed newspaper. These were analyzed alongside loans granted to businesses between 50 and 200 miles away from the same defunct paper.
The difference between the two groups was startling. Loan spread—that is, the interest rate above prime charged to the lender—was approximately 30.24 basis points higher for businesses in the “blast zone” of a newspaper closure. For the average loan in the sample, which would be a 40-month loan of $119 million, this equates to about $1.2 million in total additional interest.
By way of explanation, Stice surmises that local newspapers play an essential informational and monitoring role. Without good reporting to shed light on everything a business might try to hide from a lender, banks become less trusting and more cautious. And this pushes up the cost of capital.
Backing up this speculation, the researchers found that the difference in loan spread was greater for firms with poor accounting quality and a weaker monitoring environment (i.e. a non-Big 4 auditor and less attention from financial analysts).
In addition, the researchers looked at changes in the local economy leading up to and following a local newspaper failure. Surprisingly, they found no general correlation between economic decline and the shuttering of a newspaper. This seemed to disprove the potential supposition that a worsening economic picture was the root cause of higher interest rates, and the newspaper closures were merely a symptom.
Stice’s paper adds to a growing body of research literature about the far-ranging impacts of newspaper losses in the U.S. For example, several studies point to a possible link to corruption cases, including a 2018 paper suggesting that the closure of a local paper drives up municipal bond offering yields (a proxy for anticipated malfeasance) by 5.5 basis points on average.
And Costello’s own Brad Greenwood has found that the disappearance of local newspapers leads directly to more corruption charges against public officials in affected areas.
Collectively, these findings beg the question: What makes the collapse of one newspaper so significant, when digital journalism is still so plentiful?
“An assumption that we’ve all made in the past 20 years is that online media is a substitute for local media. And this does not appear to be the case,” Stice says. “If you’re in New York and you’re writing an article about San Francisco, you just don’t have the institutional knowledge. You don’t have the boots on the ground, you don’t have the context, you’re just not as good because you’re not there.”
Stice also believes that incentives for online journalism favor polarizing clickbait over less partisan, factual issues that may be more meaningful for local economies. “Even if they’re a local online person, every single journalist has a global audience,” says Stice. “You take away the economic incentive for people to dig deep into local stories. You’re just incentivized to run with anything that can get you attention because no story lasts longer than a day or two.”
By the same token, Stice emphasizes that these are just informed guesses and only more research will provide true answers. “What’s most fascinating about this is we’ve identified a problem but we don’t know what the cause is. Something needs to be done, that’s for sure. But what it is, that’s up to people whose pay grade is far greater than mine.”