Near-miss disaster violations and investor reactions

Abstract

Investors penalize firms for their misconduct because it violates expectations that firm adhere to generally agreed upon norms and standards. In this paper, we present a new class of misconduct events, labeled “near-miss” events, which may bring to investor attention the potential disaster that was averted because of this violation revelation. Examples of such events include safety inspection violation reports identifying violations that may lead to imminent disasters. We develop a theoretical framework theorizing how investor reactions are shaped by a different mechanism in these contexts. We hypothesize that investor reactions will be affected by the saliency of past disasters in the industry, and how this relationship is moderated by the extent of a firm’s vulnerability to disaster. Our empirical investigation in the context of mining industry provides broad support for this novel mechanism and has implications for research on organizational misconduct and strategic research on investor reactions.