Not All Sparks Light a Fire: Stakeholder and Shareholder Reactions to Critical Events in Contested Markets

Abstract

This paper examines when and how a critical mass of social and political stakeholders mobilizes against a corporate organization and the impact of such mobilization on the organization’s market value. Our study employs a dataset of more than 51,000 media-reported events describing the interactions among almost 2,300 political, social, and economic stakeholders and 19 gold-mining firms trading on the Toronto Stock Exchange and operating mines in emerging markets around the world. We first examine the conditions and dynamics that explain whether an isolated, stakeholder-initiated negative statement or action—a “spark” or critical event—goes unnoticed or escalates into a cascade of stakeholder reactions targeting the firm. Second, we examine whether such sparks and the ensuing cascades of stakeholder reactions affect shareholders’ valuation of the firm. We argue and show empirically that both stakeholders’ and shareholders’ reactions following critical events are largely influenced by stakeholders’ prior beliefs about the target organization and by peer stakeholders’ reactions to the critical event. Stakeholders with positive beliefs about the firm before the critical event mobilize to defend it, and those with negative prior beliefs reinforce their opposition. Shareholders also take note of the other stakeholders’ prior beliefs and react negatively to critical events if the firm has a history of conflict with its stakeholders. Thus unconnected or loosely connected stakeholders who reveal their beliefs about a firm through public statements and actions influence each other’s reactions to critical events and shareholders’ assessments of the firm’s value.