Regulatory cost effects in a good news environment: The intra-industry reaction to the Alaskan oil spill

Abstract

The grounding of the Exxon Valdez on 24 March 1989, led to considerable public pressure for United States petroleum companies relative to environmental concerns. Previous studies (e.g., Dowdell et al., 1992, pp. 286–287; Blacconiere and Patten, 1994, pp. 360–361) suggest that this increased pressure, and potential for future regulation, would decrease market values of other firms in the industry. However, the Alaskan oil spill also triggered substantial increases in both wholesale and retail gasoline prices in the US immediately following the accident. It appears that the unexpected product price increase was interpreted as good news for the intra-industry firms. Our study examines market returns for 25 petroleum companies other than Exxon during the fifteen trading days following the accident. In contrast to previous studies of the impact of catastrophic events on intra-industry firms (Bowen et al., 1983; Hill and Schneeweis, 1983; Dowdell et al., 1992; Blacconiere and Patten, 1994), we find that portfolio cumulative abnormal returns (CARs) following the oil spill were significantly positive. However, cross-sectional analysis of individual company CARs provides evidence suggesting that the threat of increased regulatory costs did adversely affect firm values. Specifically, firms discussing Alaskan operations in their financial reports, larger firms, and firms with less extensive prior environmental disclosure had less positive market reactions.