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THE EFFECT OF PUBLISHED REPORTS OF ENVIRONMENTAL POLLUTION ON STOCK PRICES

This study adds to the empirical evidence supporting a significant connection between ethics and profitability by examining the connection between published reports of unethical behavior—in terms of environmental pollution—by publicly traded U.S. and multinational firms and the performance of their stock. Using reports of environmental pollution—air, or water pollution or environmental cleanup— published in the Wall Street Journal from 1989 to 1993, the analysis shows that the actual stock performance for those companies was lower than the expected market adjusted returns. Unethical conduct by firms which is discovered and publicized does impact on the shareholders by lowering the value of their stock for an appreciable period of time. Whatever their views on whether ethical behavior is profitable, managers should be able to see a definite connection between unethical behavior and the worth of their firm’s stock. Stockholders, the press and regulators should find this information important in pressing for greater corporate and managerial accountability.