Stock Market Response to Firms’ Misconduct

Abstract

Labor rights violations and environmental challenges have caused companies to come under
increasing society’s pressure to achieve higher sustainability standards. Using a novel dataset of worldwide industrial disasters and companies allegedly involved in them, I examine whether large companies suffer systematic stock market losses after disasters. I estimate an average drop in price returns of 1.47 percentage points on the day after the disaster and 3.21 over one week. Accordingly, volatility soars. I then discuss the possible mechanisms behind this negative market response. I focus on harm to the reputation for sustainability and I examine the media’s attention to environmental and labor topics through a sentiment analysis of disaster-related news. I find that a more negative tone of the news is associated with larger stock market losses.

Keywords: Industrial Disasters, Reputation, Stock Market Returns

JEL Classification: F23, F63, G14, Q53