Environmental Violations, Legal Penalties, and Reputation Costs

This paper examines the sizes and determinants of fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental laws. We find that legal penalties are not significantly related to firm size, indicating no support for views that large companies face unusually small legal penalties. In fact, we can explain very little of the cross-sectional variation in legal penalties, lending support to arguments that such penalties are highly variable and unpredictable. On average, firms violating environmental laws suffer statistically significant losses in the market value of firm equity. The losses are of similar magnitude to the legal penalties imposed, indicating that legal penalties, and not reputational losses, are most important in disciplining and deterring environmental violations