Equal Employment Opportunity Law and Firm Profitability

Abstract

Based on a sample of 260 cases reported in the Wall Street Journal between 1964 and 1986, this study finds that the equity value of firms charged with violating equal employment opportunity (EEO) laws fell at the time that a suit, decision, or settlement was announced. Most dramatically, the value of firms involved in class action suits fell 15.6 percent on average around the time of the suit. Further, the average loss to shareholders exceeds the amount firms are required to spend to settle the case. This may be due to the expected costs of changing employment practices or to the information about the firm's management that is revealed by the case. A staggering number of statutes, amendments, and court decisions regulating equal opportunity in employment have been passed during the past 25 years. Firms found guilty of violations of equal employment opportunity laws have been required to pay millions of dollars in back pay and to alter their employment practices to comply with the laws. This study measures the costs to firms resulting from government and private lawsuits, and the further costs of losing those suits. I address this question by examining changes in the market value of the equity of firms at the time a lawsuit is filed for a violation of an equal employment opportunity (EEO) law and at the time a decision of guilty or a settlement