Do Investors Care about Corporate Apologies? Evidence from Chemical Disasters

Abstract

This paper examines the stock market reaction to corporate apologies. We construct an extensive database of corporate apologies issued for major chemical disasters between 1985 and 2017. Results from event studies and cross-sectional regressions suggest that 1) the average effect of an apology does not affect the implicated firm’s stock price; but 2) the type and timing of the apology are associated with significant abnormal returns. In particular, firms that shift the blame to others consistently experience positive abnormal returns, while firms who admit to making mistakes tend to face negative stock market reactions in the longer-term. Greater media coverage for the chemical spill is associated with a negative stock market response while greater coverage for the apology is associated with a positive stock market response. Our results have practical implications for corporate crisis management and our understanding of what makes an effective apology.