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Stock Market Response to Firms’ Unethical Conduct

In the last decades, labor rights violations and tangible environmental challenges have caused companies to come under increasing society’s pressure to achieve environmental and social goals. Using a novel dataset on worldwide industrial disasters and companies (allegedly) involved in them, I examine whether companies suffer systematic stock market losses after malpractices’ disclosure through industrial disasters. I estimate an average drop in price returns of 1.47 percentage points on the day after the disaster and of 3.21 percentage points over the week after. I then discuss the possible mechanisms behind the negative stock market response to industrial disasters through a series of exercises that exploit heterogeneity in disasters’ and companies’ characteristics. Notwithstanding other possible channels, correlations show that stock market losses are consistent with reputation losses after industrial disasters.