Investor Assessment of Reputational Penalties for Environmental Violations: A Replication and Extension Study of U.S. Firms from 1980-2016

Do firms face reputational penalties for committing environmental violations? This paper replicates the work of a previous empirical study to confirm the relationship between abnormal returns and legal penalties following the announcement of a violation. It then goes on to extend the study using more recent data to assess how reputational costs change over time. Across both sets of data, firms suffer abnormal stock price decreases following the announcement of an environmental crime. The size of prospective legal penalties is on average larger than the decrease in market value, indicating that investors base their reaction to violations off the present value of legal costs faced by the firm. Average abnormal returns decreased in size between the two studies, indicating that over time as investors started paying more attention to environmental responsibility, they became less surprised by new violations. The results of the studies taken together have public policy implications, indicating that at present investors face immediate penalties following a violation in the form of regulatory costs, but in the long term may also face reputational penalties due to increased investor attention to environmental performance