When it comes to financial news, many of us are comforted by the assurance of a vigilant news media whose hounding reporters hammer executives, scour data for economic weakness around the world and haunt factory gates for tell-all tales of troubles on the production line.
The reality is very different, as academics and top reporters who covered some of the 1990s’ greatest financial debacles outlined in papers and presentations at a March 5-6 workshop on the media and economic performance. The sessions were organized by the Stanford Institute for International Studies with participation from Graduate School of Business faculty and visiting scholars from around the country.
Consider the quarterly interactions at financial-reporting time among publicly traded companies, financial analysts and the press. “Who’s spinning whom,” asked Peter Blair Henry, associate professor of economics at the Business School. “Are companies and analysts spinning the media, or do the media spin news as they see fit?” The issue is important when studying stock market reaction to corporate financial results, Henry noted in appraising work by Luigi Zingales of the University of Chicago and Alexander Dyck of Harvard University.
Zingales and Dyck considered cases of earnings “surprises” – usually bad news. They asked whether companies influenced their share prices by emphasizing so-called “street earnings” – a calculation stripped of certain corporate costs – rather than full results under generally accepted accounting principles. Zingales and Dyck found stock prices reacted strongly in the short run to the earnings type used in media reports. The media reports were in turn influenced by the order of presentation in quarterly financial press releases.
The result is unwelcome distortions. It’s clear, Henry said, that erroneous securities pricing can lead to poor capital allocations in an economy, not to mention investor disappointment with subsequent events. The data support the idea that media “spin” of financial results affects subsequent stock prices, Henry said. But what causes media “spin”? Henry argued it isn’t entirely clear that, as the authors posited, reporters put a positive spin on company earnings in an unspoken quid pro quo exchange for exclusive future information. That conclusion ignores an interpretation that financial analysts with investment banking ties are at least as beholden to companies as reporters. Indeed, Henry argued, “the analysts may be ‘spinning’ the media” when reporters call for interpretation.
Missing big stories
If news media may play a misleading role over short periods, what about their ability to spot economic rot over time? Here, too, the news is not good, reporters from influential financial publications said in a separate panel discussion. In frank after-the-fact appraisals from the reporting trenches, panelists explored oversights, flaws and outright failure in the now-classic case of Enron Corp. and, on an even larger, international scale, the Russian stock and currency crisis of 1998.
Few foreign journalists watched 1990s Russia as closely as Edward Lucas, who spent the decade reporting for the British newspaper The Independent, the British Broadcasting Corporation and later The Economist. Russia was seen with a skewed eye during the era, Lucas said, misled by a “hurrah chorus” of diplomats, bankers, investors and journalists. “We were all grateful for the downfall of Communism,” Lucas noted. Russia was mislabeled a recovering First World economy rather than the developing nation it was. “It was assumed that Russia was too big to fail,” he said.
After the first, sharp contractions with the fall of the Soviet regime in 1989 and the early 1990s, Russia’s economic decline appeared to slow. A speculative stock bubble built with an onrush of Western funds. While a patina of comfort cosseted a few privileged in Moscow, the lives of ordinary Russians often were in ruin. A barter economy erupted in which workers peddled goods such as tires stolen from their workplaces for foodstuffs stolen from farms. Incipient civil war lingered.
Yet reporters from Western media failed to sound an alarm. More speculative investment funds poured in, month after month, from the West. “Accent the positive” was the guiding principle for all Westerners in Russia, said Bill Powell, a Newsweek reporter at the time. Powell said investment bankers in Moscow to drum up business told him “with a straight face” that the sight of starving coal workers trying to trade coal for food was evidence of an admirable entrepreneurial spirit alive and well within Russian society.
For much of the 1990s Russia’s gross domestic product contracted. Unemployment soared, and often those who had jobs weren’t properly compensated. It was estimated that just 40 percent of the nation’s workforce was paid in full and on time. In the first eight months of 1998 the stock market had plunged 75 percent in value. Exports of oil, natural gas and other raw materials – which strikingly accounted for nearly half of all of Russia’s output – continued to prop up the economy, but domestic demand fell nearly 8 percent through 1998 and investment tumbled 28 percent that year, according to International Monetary Fund figures. Yet much of this was not noted in the Western press.
The Russian case perhaps comprised sins of omission. Domestic financial news has been increasingly contorted by sins of commission, journalists said. Richard Waters, West Coast director for the London-based Financial Times, noted a rapid sharpening of corporate public relations expertise. “It’s amazing how much better companies have gotten at telling reporters what they want to tell them,” said Waters, who added that “the amount of spin in the financial world certainly has come to rival that in Washington.”
New PR tactics
“It’s no secret that journalists trade access for soft treatment,” Waters noted. And corporate PR increasingly has taken advantage of this. Forgoing usually wasted efforts to soften up reporters by socializing, public relations practitioners are using more nuanced techniques – both the carrot and the stick. “Access is the carrot,” said Waters, but now “bullying of the media has gone to new heights.” Waters said he “has seen companies go out of their way to besmirch good reporters” by calling publishers and network executives to complain about coverage.
Against this trend, journalists must struggle “to keep ourselves in line, asking tough questions.” Seeking to counter some of the public relations strategies, the Financial Times now uses “specialist reporters” skilled in financial analysis and other tools to back up the day-to-day coverage and ferret out stories that otherwise would be missed.
At Enron, there were missed leads aplenty, said Bethany McLean, a senior writer at Fortune magazine credited with an early article questioning the strength of Enron’s structure. McLean is co-author, with Peter Elkind, of The Smartest Guys in the Room, a study of fraud and financial foibles at what was once one of the nation’s most-admired companies.
As McLean pointed out, her Fortune article, “Is Enron Overpriced?” appeared in March 2001. Yet in 1993 an article in Forbes sharply questioned Enron’s troubling mark-to-market accounting for assets, which claimed profits for investments long before it was clear that they would in fact evolve. A few years later, an article in Fortune again signaled concern. Some of this information sat in public litigation material that might have alerted other journalists, McLean said. But “all of this disappeared from the radar screen” and “by the late 1990s, all of that had been forgotten,” she added.
“Enron was a perfect story that everybody wanted to believe,” McLean noted. In 2001, Jeffrey Skilling, then president of Enron, “famously said that the company’s brand new, money-losing broadband [Internet] trading operation was already worth over $36 billion – and the Wall Street analysts believed him.” McLean’s own publication joined the parade. “Unfortunately, in 2001, we fell victim to this; completely forgetting all the work that went before, we published a really positive story about Enron,” she said. In fact, she added, mere months before the company declared bankruptcy, “you would have been really hard-pressed to find any sharp story about Enron.”
Only when a talkative Wall Street short-seller, betting against companies’ stock rising, spotted an analysis of Enron’s mark-to-market accounting in a Texas regional edition of the Wall Street Journal did a tip start floating that journalists should focus more sharply on the company. That was insight that McLean picked up and ran with, relying on her own skills as a former Goldman Sachs & Co. financial analyst to pick through the company. And so the first red flag of Enron’s final months was raised.
Chance brought in one of two Journal reporters who would finally crack the Enron puzzle. John Emshwiller, a senior national correspondent and one of the paper’s most skilled investigative reporters, happened to be on weekend duty in June 2001 when Skilling, Enron’s storied strategist, resigned suddenly. It was a shocking move that would draw national attention the following week. “Not only that, but Enron had cited ‘family’ reasons for Skilling’s departure – which was pretty odd because Skilling was divorced,” Emshwiller noted dryly.
Emshwiller was lucky. Improbably, Skilling returned a Sunday call from Emshwiller, something that executives who resign suddenly rarely do. Skilling, who seemed in a confessional mood, had run into a skilled questioner and analyst. “It was one of the strangest interviews I’ve ever had,” recalled Emshwiller, who is the co-author with Rebecca Smith of 24 Days, a study of the two reporters’ work during the surprisingly swift downfall of Enron.
Emshwiller elicited from Skilling an odd admission that he, Skilling, likely would have resigned if Enron’s stock price hadn’t been falling. The reporter quickly wrote the first questioning piece about Skilling’s resignation, which ran in the next day’s Journal. But there was more. In putting together a story on a company he knew little about, Emshwiller’s analytical eye was drawn to a mention of partnerships that seemed peculiar. This later became the base for further study and stories. And then came a series of calls from a mysterious company insider “who led us into the darker side of Enron,” Emshwiller recalled.
Fred Rose is a freelance writer. He originally wrote this article for the Stanford Graduate School of Business.
