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How Bad is Bad News? Assessing the Effects of Environmental Incidents on Firm Value

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  • Lundgren, Tommy

    ()
    (Umeå School of Business)

  • Olsson, Rickard

    ()
    (Umeå School of Business)

Abstract

Based on a formal model of how investments in corporate social responsibility act upon .rm value through goodwill, we derive the hypothesis that under uncertainty, bad news are detrimental to good-will, and subsequently have a negative impact on value. We examine by event study methodology whether bad news in the form of environmental (EV) incidents a¤ect .rm value negatively as measured by abnormal returns using a global data set. An EV incident is a company incident allegedly in violation of international norms on environmen-tal issues. We analyze 142 EV incidents 2003-2006. The incidents are generally associated with negative cumulative abnormal returns, but which are not statistically signi.cant, except for incidents for .rms in the EURO zone. The results are robust with respect to a number of variations in test methodology.

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Bibliographic Info

Paper provided by Sustainable Investment Research Platform in its series Sustainable Investment and Corporate Governance Working Papers with number 2008/1.

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Length: 22 pages
Date of creation: 30 Jan 2008
Date of revision:
Handle: RePEc:hhb:sicgwp:2008_001

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  1. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  2. Catherine M. Paul & Donald Siegel, 2006. "Corporate social responsibility and economic performance," Journal of Productivity Analysis, Springer, vol. 26(3), pages 207-211, December.
  3. Michael Rauscher, 2006. "Voluntary Emission Reductions, Social Rewards, and Environmental Policy," CESifo Working Paper Series 1838, CESifo Group Munich.
  4. Khanna, Madhu & Quimio, Wilma Rose H. & Bojilova, Dora, 1998. "Toxics Release Information: A Policy Tool for Environmental Protection," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 243-266, November.
  5. Abagail McWilliams & Donald S. Siegel & Patrick M. Wright, 2006. "Corporate Social Responsibility: International Perspectives," Rensselaer Working Papers in Economics 0604, Rensselaer Polytechnic Institute, Department of Economics.
  6. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
  7. Khanna, Madhu & Damon, Lisa A., 1999. "EPA's Voluntary 33/50 Program: Impact on Toxic Releases and Economic Performance of Firms," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 1-25, January.
  8. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  9. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  10. Hamilton James T., 1995. "Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory Data," Journal of Environmental Economics and Management, Elsevier, vol. 28(1), pages 98-113, January.
  11. Lundgren, Tommy, 2007. "On the Economics of Corporate Responsibility," Sustainable Investment and Corporate Governance Working Papers 2007/3, Sustainable Investment Research Platform.
  12. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
  13. Tommy Lundgren, 2003. "A Real Options Approach to Abatement Investments and Green Goodwill," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 25(1), pages 17-31, May.
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