Extent and evolution of the stock market disciplinary effect in the US: The case of major environmental crises

Abstract

Numerous countries use information-based strategies to supplement or replace traditional environmental risk-control approaches. These strategies rest on the deterrence effect: Informed stakeholders, including media and investors, penalize polluters, which leads them to self-regulate, thereby reinforcing the mandatory regulation. To effectively tackle the increase in environmental problems, the deterrence effect requires stakeholders to be concerned about the environment and be prepared to significantly and increasingly punish polluting firms. This paper provides evidence of the extent and evolution of this stock market disciplinary effect following the disclosure of major environmental crises over 6 decades, using an event study approach. We use the market reaction following non-environmental crises to establish a benchmark against which we measure market reaction to environmental crises, and limit our sample to high-profile events likely to be immediately attributed to firms. Overall, the market reacts more negatively to environmental than to non-environmental crises. However, the wealth losses following environmental crises have not increased since the early 1960s. The deterrence effect has thus not amplified in the US over the last 6 decades, indicating that information-based approaches are probably insufficient at regulating the escalating environmental problems.