The Reputational Penalties for Environmental Violations: Empirical Evidence

Karpoff, Jonathan M.; Lott, John R.; Wehrly, Eric W.

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The Reputational Penalties for Environmental Violations: Empirical Evidence

Journal of Law and Economics, Vol. 68 (October 2005), pp. 653-675

35 Pages Posted: 16 Aug 2005 Last revised: 21 Jun 2017

See all articles by Jonathan M. Karpoff

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business; European Corporate Governance Institute (ECGI)

This paper examines the sizes of the fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms violating environmental laws suffer statistically significant losses in the market value of firm equity. The losses, however, are of similar magnitudes to the legal penalties imposed; and in the cross section, the market value loss is related to the size of the legal penalty. Thus, environmental violations are disciplined largely through legal and regulatory penalties, not through reputational penalties.

Keywords: Environmental violations, corporate misconduct, legal penalties, reputation costs

JEL Classification: K32, K42, Q58

Suggested Citation: Suggested Citation

Karpoff, Jonathan M. and Lott, John R. and Wehrly, Eric W., The Reputational Penalties for Environmental Violations: Empirical Evidence. Journal of Law and Economics, Vol. 68 (October 2005), pp. 653-675, Available at SSRN: https://ssrn.com/abstract=747824