Anda di halaman 1dari 24

The University of Chicago The Booth School of Business of the University of Chicago The University of Chicago Law School

The Reputational Penalties for Environmental Violations: Empirical Evidence Author(s): JonathanM. Karpoff, JohnR. Lott, Jr., EricW. Wehrly Reviewed work(s): Source: Journal of Law and Economics, Vol. 48, No. 2 (October 2005), pp. 653-675 Published by: The University of Chicago Press for The Booth School of Business of the University of Chicago and The University of Chicago Law School Stable URL: http://www.jstor.org/stable/10.1086/430806 . Accessed: 13/04/2012 11:28
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

The University of Chicago Press, The University of Chicago, The Booth School of Business of the University of Chicago, The University of Chicago Law School are collaborating with JSTOR to digitize, preserve and extend access to Journal of Law and Economics.

http://www.jstor.org

THE REPUTATIONAL PENALTIES FOR ENVIRONMENTAL VIOLATIONS: EMPIRICAL EVIDENCE*


JONATHAN M. KARPOFF, University of Washington and ERIC W. WEHRLY University of Washington JOHN R. LOTT, JR., American Enterprise Institute

Abstract
This paper examines the sizes of the nes, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms that violate environmental laws suffer statistically signicant losses in the market value of rm equity. The losses, however, are of similar magnitudes to the legal penalties imposed, and in the cross section, the market value loss is related to the size of the legal penalty. Thus, environmental violations are disciplined largely through legal and regulatory penalties, not through reputational penalties.

I.

Introduction

o rms that pollute the environment hurt their reputations? Many researchers believe they do. Michael Porter and Claas van der Linde claim that environmental insensitivity lowers a rms sales and increases its costs.1 Similarly, Sheoli Pargal and David Wheeler, Seema Arora and Timothy Cason, and Shameek Konar and Mark Cohen claim that community pressure

* Jonathan M. Karpoff is the Norman J. Metcalfe Professor of Finance and Eric W. Wehrly is a Ph.D. candidate at the University of Washington Business School; John R. Lott, Jr., is a resident scholar at the American Enterprise Institute. We thank an anonymous referee, Sam Peltzman (the editor), Mike Barnett, and seminar participants at the University of Washington and the 2002 Environmental Protection Agency conference Economics and the Environment for helpful suggestions, Graeme Rankine for collaboration in an earlier version of this paper, and Elvis Ziu for research assistance. Karpoff received support from the Deans Discretionary Fund at the University of Washingtons School of Business. 1 Michael E. Porter & Claas van der Linde, Toward a New Conception of the EnvironmentCompetitiveness Relationship, J. Econ. Persp., Fall 1995, at 97.
[Journal of Law and Economics, vol. XLVIII (October 2005)] 2005 by The University of Chicago. All rights reserved. 0022-2186/2005/4802-0024$01.50

653

654

the journal of law and economics

and informal sanctions can penalize environmental violations.2 As an example, the Exxon Valdez oil spill so angered many consumers that it triggered boycotts of Exxons retail outlets.3 Konar and Cohen argue that environmentally conscious investors can penalize polluting rms by increasing their costs of capital and decreasing their market values, a notion that is modeled by Robert Heinkel, Alan Kraus, and Josef Zechner.4 In this paper, we measure the extent to which market-imposed sanctions what we label reputational penaltiesimpose signicant costs on rms that violate environmental regulations. Along the way, we provide the rst large-sample estimates of the share valuation impact on rms that violate environmental regulations. We also examine the sizes of the legal penalties imposed on violating rms. The existence and size of any reputational penalty is important for public policy. Optimal penalty theory, as discussed by Gary Becker, requires that the expected total penalty for an illegal activity equals the activitys total social cost.5 The total penalty consists of explicit legal sanctions imposed through regulatory, civil, and criminal proceedings, plus reputational penalties. If reputational penalties are large, then legal penalties optimally should be small. Conversely, small reputational penalties imply a more important role for legal penalties in an optimal framework. Using data from 478 environmental violations by publicly traded companies for 19802000, we nd that allegations or charges that a rm violated environmental regulations correspond to economically meaningful and statistically signicant losses in the rms share values. Initial press announcements containing allegations of a violation are associated with an average abnormal stock return of 1.69 percent. When the initial announcement indicates that the rm formally has been charged with a violation, the average abnormal stock return is 1.58 percent. It turns out, however, that these losses are similar in size to these rms legal penalties. In a subsample of 148 rms on which we have information on the legal penalties, the mean ne or damage award (in constant year 2000 dollars) is $13.2 million, and the mean forced compliance or remediation cost is $93.6 million. The combined legal penalty equals 2.26 percent of
2 See Sheoli Pargal & David Wheeler, Informal Regulation in Developing Countries: Evidence from Indonesia, 104 J. Pol. Econ. 1314 (1996); Seema Arora & Timothy Cason, Why Do Firms Volunteer to Exceed Environmental Regulations? Understanding Participation in EPAs 33/50 Program, 72 Land Econ. 413 (1996); and Shameek Konar & Mark A. Cohen, Why Do Firms Pollute (and Reduce) Toxic Emission? (Working paper, Vanderbilt Univ., Owen Grad. Sch. Mgmt. 1998). 3 Philip Shabecoff, Six Groups Urge Boycott of Exxon, N.Y. Times, May 3, 1989, at A17. 4 Shameek Konar & Mark A. Cohen, Does the Market Value Environmental Performance? 83 Rev. Econ. & Stat. 281 (2001); and Robert Heinkel, Alan Kraus, & Josef Zechner, The Effect of Green Investment on Corporate Behavior, 36 J. Fin. & Quant. Analysis 431 (2001). 5 Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. Pol. Econ. 169 (1968).

reputational penalties

655

these rms share values, on average. Thus, while environmental violators lose market value, the losses reect these rms legal penalties. Marketinduced reputational penalties, on average, are negligible. We therefore conclude that legal penalties, and not reputational penalties, are the primary deterrents to environmental violations. This paper is organized as follows. Section II describes the controversy about the existence and size of a reputational penalty for environmental violations. Section III describes the data, and Section IV reports on the share value effects for rms investigated for or charged with environmental violations. Section V reports on the sizes of the legal penalties for violations, and Section VI investigates the importance of reputational penalties. In Section VII, we investigate the determinants of cross-sectional differences in the market value losses. Section VIII concludes the paper. II. The Reputational Cost Controversy A. Details of the Controversy

As Benjamin Klein and Keith Lefer argue, reputation disciplines certain types of wrongdoing because market transactions internalize their costs.6 Companies that defraud customers, for example, lose sales. Those that cheat employees or other suppliers face higher input costs or lost trade credit. The cost of the illegal activity is internalized because the cheating rm loses at least some of the gains that accrue from repeat business with consumers, employees, or suppliers. Consistent with such arguments, previous research indicates that reputational costs are large for false advertising,7 product recalls,8 lack of safety,9 deceptive bidding practices,10 punitive damages lawsuits,11 defense procurement fraud,12 and nancial misrepresentation.13 Jonathan Karpoff and John Lott nd that over 90 percent of the penalties imposed
6 Benjamin Klein & Keith B. Lefer, The Role of Market Forces in Assuring Contractual Performance, 89 J. Pol. Econ. 615 (1981). 7 Sam Peltzman, The Effects of FTC Advertising Regulation, 24 J. Law & Econ. 403 (1981). 8 Gregg Jarrell & Sam Peltzman, The Impact of Product Recalls on the Wealth of Sellers, 93 J. Pol. Econ. 512 (1985). 9 Mark L. Mitchell & Michael T. Maloney, The Role of Market Forces in Promoting Air Travel Safety, 32 J. Law & Econ. 329 (1989). 10 Clifford Smith, Jr., Economics and Ethics: The Case of Salomon Brothers, 5 J. Applied Corp. Fin. 23 (1992). 11 Jonathan M. Karpoff & John R. Lott, Jr., On the Determinants and Importance of Punitive Damages Awards, 42 J. Law & Econ. 527 (1999). 12 Jonathan M. Karpoff, D. Scott Lee, & Valaria Vendrzyk, Defense Procurement Fraud, Penalties, and Contractor Inuence, 107 J. Pol. Econ. 809 (1999). 13 Jonathan M. Karpoff, D. Scott Lee, & Gerald S. Martin, The Cost of Cooking the Books (Working paper, Texas A&M Univ. & Univ. Washington 2004).

656

the journal of law and economics

on rms committing private frauds reects lost reputation.14 Only a small portion of the nancial penalties imposed on such rms is due to criminal or civil penalties and other court-imposed costs. Many researchers argue that reputational concerns motivate, or should motivate, rms to comply with environmental rules. As an example, Christopher Decker nds that rms that comply with environmental rules receive new construction permits from environmental agencies more quickly than do rms with many instances of noncompliance.15 Cohen argues that evidence of an environmental violation might adversely affect customers perceptions about the safety or quality of the rms products.16 Paul Downing and James Kimball suggest that managers comply with environmental regulations because they care about their companies imagesa notion that is supported by survey evidence reported by Irene Henriques and Perry Sadorsky and by Piotr Zerbe.17 According to these arguments, the rms customers, employees, and suppliers can be motivated by environmental concern to change their reservation prices in doing business with the rm. Environmentally costly activities that attract unfavorable attention could then lower demand for the rms products or increase the rms costs. Using similar arguments, Shakeb Afsah, Benoit Laplante, and Wheeler, and Laplante, Paul Lanoie, and Maite Roy suggest that pressure by nonshareholder stakeholders can motivate rms to control pollution emissions.18 The counterargument holds that reputational penalties are small for environmental violations. Environmental violations differ from frauds and other types of wrongdoing in that they impose costs on parties other than those with whom the polluting rm does business. As an example, downstream shermen are damaged if an electroplating company dumps toxic chemicals into a municipal storm sewer. But the shermen do no business with the
14 Jonathan M. Karpoff & John R. Lott, Jr., The Reputational Penalty Firms Bear from Committing Criminal Fraud, 36 J. Law & Econ. 757 (1993). Cindy Alexander obtains similar results using a sample of purely criminal cases. Cindy R. Alexander, On the Nature of the Reputational Penalty for Corporate Crime: Evidence, 42 J. Law & Econ. 489 (1999). 15 Christopher S. Decker, Corporate Environmentalism and Environmental Statutory Permitting, 46 J. Law & Econ. 103 (2003). 16 Mark A. Cohen, Environmental Crime and Punishment: Legal/Economic Theory and Empirical Evidence on Enforcement of Federal Environmental Statutes, 82 J. Crim. Law & Criminology 1054 (1992). 17 See Paul B. Downing & James N. Kimball, Enforcing Pollution-Control Laws in the United States, 11 Poly Stud. J. 55 (1982); Irene Henriques & Perry Sadorsky, The Determinants of an Environmentally Responsive Firm: An Empirical Approach, 30 J. Envtl. Econ. & Mgmt. 386 (1996); and Piotr M. Zerbe, Evaluation of Predominant Environmental Management Practices in the Canadian Pulp and Paper Industry (Working paper, Univ. British Columbia, Dept Resource Mgmt. & Envtl. Stud. 1997). 18 See Shakeb Afsah, Benoit Laplante, & David Wheeler, Controlling Industrial Pollution: A New Paradigm (Policy Research Working Paper No. 1672, World Bank 1996); and Benoit Laplante, Paul Lanoie, & Maite Roy, Can Capital Markets Create Incentives for Pollution Control? 26 Ecological Econ. 31 (1998).

reputational penalties

657

rm, and the rms customers have no direct incentive to lower their demands for the rms products if the dumping does not affect the quality of those products. As a result, the polluting electroplating company could experience no reputational costs. This counterargument implies that environmental violations are similar to such regulatory violations as check kiting and failure to report currency transactions, which Karpoff and Lott and Alexander nd to have negligible reputation costs.19 Consistent with this view, Julie Doonan, Lanoie, and Laplante report survey evidence that indicates that unfavorable press coverage and consumer pressure do not affect pollution output by paper pulp mills.20 The debate over the size of any reputational costs has affected the U.S. Sentencing Commissions deliberations over criminal penalties for environmental violations. The commission issued sentencing guidelines for crimes by organizations in 1991 but specically excluded environmental violations from these guidelines. It since has considered several proposals for environmental guidelines. But the lack of agreement over whether to impose higher penalties for environmental crimes than for other business crimes has prevented the commission from adopting any of the proposals.21 At the heart of this disagreement, we propose, is the lack of evidence over whether environmental noncompliance imposes signicant reputational costs.22 B. Related Research

A substantial body of research examines how regulators should set legal penalties for environmental harms.23 Empirical evidence on the actual sizes of such penalties, however, is limited. Several papers examine the regulatory nes imposed for single types of environmental discharges using relatively
Karpoff & Lott, supra note 14; Alexander, supra note 14. Julie Doonan, Paul Lanoie, & Benoit Laplante, Environmental Performance of Canadian Pulp and Paper Plants: Why Some Do Well and Others Do Not? (unpublished manuscript, cole des Hautes E tudes Commerciales, Montre E al 2002). 21 See, for example, the U.S. Sentencing Commission, Report from Advisory Group on Environmental Sanctions (1993) (http://www.ussc.gov/publicat/environ.pdf). The U.S. Sentencing Guidelines as amended on November 1, 2003, reect several cumulative amendments to the environmental provisions. See the U.S. Sentencing Commission, 2003 Federal Sentencing Guidelines Manual, chap. 2, part Q (http://www.ussc.gov/2003guid/tabcon03_1.htm). But the Guidelines for Organizations (chap. 8) contain no provisions for environmental violations. 22 See Paul E. Fiorelli & Cynthia J. Rooney, The Environmental Sentencing Guidelines for Business Organizations: Are There Murky Waters in Their Future? 22 B.C. Envtl. Aff. L. Rev. 481 (1995). 23 See Jean-Philippe Barde, Environmental Policy and Policy Instruments, in Principles of Environmental and Resource Economics: A Guide for Students and Decision-Makers 157 (Henk Folmer & H. Landis Gabel eds. 2000); Dennis W. Carlton & Glenn C. Loury, The Limitation of Pigouvian Taxes as a Long-Run Remedy for Externalities, 95 Q. J. Econ. 559 (1980); and Dennis W. Carlton & Glenn C. Loury, The Limitation of Pigouvian Taxes as a Long-Run Remedy for Externalities: An Extension of Results, 101 Q. J. Econ. 631 (1986).
20 19

658

the journal of law and economics

small samples.24 Our data on legal penalties therefore establish a baseline of information on the sizes of the legal penalties imposed for environmental violations. Our investigation also is related to several papers that examine the share value impacts of specic types of unfavorable environmental news, such as oil or chemical spills. Michael Muoghalu, H. David Robison, and John Glascock, James Hamilton, and Robert Klassen and Curtis McLaughlin conclude that unfavorable environmental news is associated with signicant losses in share values, whereas Lanoie and Laplante, Richard Harper and Stephen Adams, Laplante, Lanoie, and Roy, Alexander, and Kari Jones and Paul Rubin nd that the share value losses are insignicant.25 We attribute these discrepancies to the relatively small samples examined in most of these studies. For example, Klassen and McLaughlin examine 22 events, and Lanoie and Laplante examine 47 events.26 Our sample of 478 violations for 19802000, in contrast, is sufciently large to construct a powerful test of the share value impact. Several papers examine stock market reactions to news about a rms environmental sensitivity, such as an investment in pollution prevention or a positive environmental rating from a nongovernmental environmental organization.27 The authors of these papers interpret a stock market reaction
24 James T. Hamilton, Going by the (Informal) Book: The EPAs Use of Informal Rules in Enforcing Hazardous Waste Laws, in 7 Advances in the Study of Entrepreneurship, Innovation, and Economic Growth 109 (Gary D. Libecap ed. 1996), examines hazardous waste violations. Mark A. Cohen, Optimal Enforcement Strategy to Prevent Oil Spills: An Application of a Principal-Agent Model with Moral Hazard, 30 J. Law & Econ. 23 (1987), examines oil spills. Neda Oljaca, Andrew Keeler, & Jeffrey Dorman, Penalty Functions for Environmental Violations: Evidence from Water Quality Enforcement, 14 J. Reg. Econ. 255 (1998), examines water pollution infractions in the state of Georgia. Cohen, supra note 16, examines a broader variety of environmental violations. For an excellent review of research on the monitoring and enforcement of environmental policy, see Mark A. Cohen, Monitoring and Enforcement of Environmental Policy, in 3 International Yearbook of Environmental and Resource Economics 44 (Tom Tietenberg & Henk Folmer eds. 1999). 25 See Michael Muoghalu, H. David Robison, & John L. Glascock, Hazardous Waste Lawsuits, Stockholder Returns, and Deterrence, 7 S. Econ. J. 357 (1990); James T. Hamilton, Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory Data, 28 J. Envtl. Econ. & Mgmt. 98 (1995); Robert D. Klassen & Curtis P. McLaughlin, The Impact of Environmental Management on Firm Performance, 42 Mgmt. Sci. 1199 (1996); Paul Lanoie & Benoit Laplante, The Market Response to Environmental Incidents in Canada: A Theoretical and Empirical Analysis, 60 S. Econ. J. 657 (1994); Richard K. Harper & Stephen C. Adams, CERCLA and Deep Pockets: Market Response to the Superfund Program, 14 Contemp. Econ. Pol. 107 (1996); see Laplante, Lanoie, & Roy, supra note 18; Alexander, supra note 14; and Kari Jones & Paul H. Rubin, Effects of Harmful Environmental Events on Reputations of Firms, in 6 Advances in Financial Economics 161 (Mark Hirschey, Kose John, & Anil Makhija eds. 2001). 26 Klassen & McLaughlin, supra note 25; Lanoie & Laplante, supra note 25. 27 See Seema Arora, Voluntary Abatement and Market Value: An Event Study Approach (unpublished manuscript, Stanford Inst. Econ. Pol. Res. 2001); Susmita Dasgupta, Benoit Laplante, & Nlandu Mamingi, Pollution and Capital Markets in Developing Countries, 42 J. Envtl. Econ. & Mgmt. 310 (2001); and Shreekant Gupta & Bishwanath Goldar, Do Stock

reputational penalties

659

to rm-specic environmental news as evidence that capital markets discourage environmental misconduct. Our investigation, however, is very different from these. We use the stock price reaction as a measure of the present value of the net costs to a rm accused of violating an environmental regulation. We then partition this cost into components that reect legal penalties and reputational penalties. III. Data

We examine 478 cases in which publicly traded rms were investigated for, accused of, or settled charges of environmental violations for 19802000. The sample is obtained from a search of the Wall Street Journal index under its environment and environmental crime listings. Additional information on many events is obtained from the Factiva database,28 including followup information on the sizes of penalties imposed that was published after 2000. To be included in the sample, the defendant rm must be listed on the 2002 Center for Research in Security Prices (CRSP) daily returns le on the day of the earliest Wall Street Journal report of its environmental violation. Because the Exxon Valdez oil spill resulted in an extremely large penalty, we exclude it from our sample. The spill occurred in March 1989 and resulted in a 1994 jury award of $5.3 billion in compensatory and punitive damages.29 Our sample consists of a wide variety of actions involving different types of environmental harm and initiated by different regulatory agencies or private parties. The following examples illustrate typical cases: 1. In 1980, FMC Corporation was indicted for providing false data to the Environmental Protection Agency (EPA) about the amount of carbon tetrachloride the rm had released in the Kanawha River in Charleston, West Virginia. 2. In 1986, a Kerr-McGee Corporation storage tank ruptured and distributed radioactive uranium hexaouride gas over a part of eastern Oklahoma, prompting a civil lawsuit from a group of nearby residents. 3. In 1997, Santa Monica, California, city ofcials charged in a lawsuit that Mobil allowed methyl tertiary butyl ether to seep in to the citys wells. 4. In 1998, six Rochester, New York, families sued Eastman Kodak alleging that lm factory chemicals caused brain cancer in their children. The wide diversity of events in the sample provides insight into the types of environmental violations that occur and are reported in major newspapers.
Markets Penalise Environment-Unfriendly Behaviour? Evidence from India (unpublished manuscript, Delhi School Econ., Ctr. Dev. Econ. 2003). 28 Dow Jones & Reuters, Factiva (http://www.factiva.com). 29 Including the Exxon Valdez event would further support our conclusion of no reputational effect. This is because the legal penalties far exceed the loss in rm share value at the time of the event. The 2-day abnormal return for Exxon is .67 percent, which represents a loss in market value of only $398 million.

660

the journal of law and economics


TABLE 1 Environmental Violations Sample
Event Classication Type of environmental harm: Air Surface or drinking water CERCLA/contaminated site Miscellaneous or multiple media Total Type of action: Criminal lawsuit Civil lawsuit Regulatory ne/action Consent order Product recall Liability assignment Total Party bringing the action: State or local agency Environmental Protection Agency Justice Department Environmental group Individuals or class-action lawsuits Total Number 127 121 167 63 478 28 197 146 31 38 38 478 101 221 86 8 62 478

Note.Distribution of 478 environmental violation events identied from the Wall Street Journal and Factiva database during the period 19802000. CERCLA p Comprehensive Environmental Response, Compensation, and Liability Act.

Table 1 provides summary information about the sample. It classies events according to the type of environmental harm, the type of lawsuit or regulatory action, and the party bringing the action. Type of Harm. The breakdown of the sample by the type of environmental harm reveals that, of the 478 events in the total sample, 127 involve air emissions, including violations of the 1970 Clean Air Act and its 1977 and 1990 amendments. A total of 121 cases involve water contamination. Of these, 89 involve surface water contamination, including violations of the 1977 Clean Water Act and the Water Quality Act of 1987, and 32 involve contamination of drinking water supplies and possible violations of the Safe Drinking Water Act of 1974. An additional 167 events involve contaminated sites and/or subsurface water contamination, typically involving violations under the Resource Conservation and Recovery Act of 1976 or the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. The types of environmental harm in the remaining 63 events either involve two or more of the preceding categories or are classied as miscellaneous. The miscellaneous group includes violations under the Toxic Substances and Control Act of 1976, charges of improper storage of hazardous

reputational penalties

661

materials, and several cases in which the specic violation is not discernible from the available press articles. Type of Action. Table 1 shows that only 28 events involve criminal lawsuits. Many more (197) involve civil lawsuits led by either private parties or such agencies as the EPA. State and federal regulatory nes or actions compose 146 events, and in 31 events the initial announcement indicates that the rm and regulatory agency agreed to a court-sanctioned consent order. In 38 events, a rm recalled a product to avoid environmental sanctions. As an example, in May 1986 General Motors recalled more than 86,000 automobiles that violated emission standards. A nal 38 events are classied as liability assignments. These involve situations in which the initial Wall Street Journal press announcement reveals that the defendant rm had been assigned liability for a previously reported environmental violation. For example, in January 1993, a California appellate court upheld most of a jury verdict requiring Shell Oil, rather than its insurers, to pay the companys estimated $1 billion cost of a toxic-waste cleanup near Denver. Party Bringing the Action. Forty-six percent (221) of the events involve lawsuits or regulatory actions brought by the EPA. An additional 86 events involve civil or criminal lawsuits led by the Department of Justice. In many of these 86 events, the Justice Department acted in cooperation with or relied in part upon EPA investigations. In 101 events, the action was brought by a state or local environmental agency. Environmental groups, such as the Sierra Club Legal Defense Fund, were directly involved at the beginning of only eight of the events (typically as plaintiffs in lawsuits), and 62 other events were initiated by individuals. This last category includes several classaction lawsuits. IV. Market Value Effects of Environmental Violation Announcements

In this section we investigate the effects on rm values when news about a violation is rst announced. In 108 of the 478 events, the initial press report indicates that an environmental violation may have occurred. We label these allegation announcements. For example, in January 1995 a WCI Steel plant discharged contaminated water into a nearby stream. The rm eventually settled with the EPA by paying an undisclosed ne, but the initial announcement revealed only that a violation might have occurred. In 136 events, the initial press report indicates that charges were led against the defendant company by a government agency or private party. In the remaining 234 cases, the initial press report indicates settlement of the case. Settlements include agreements between the defendant rm and the initiating party, consent orders, trial outcomes, and announcements of nes by regulators. Note that the events classied as settlement announcements are still the rst recorded public record of the violation. While these news events report that

662

the journal of law and economics


TABLE 2

Abnormal Stock Returns Associated with the Initial Press Announcements of Environmental Violations, by Type of Environmental Harm
Surface or Drinking Water 1.75 .01 1.55 28 2.48 1.09 3.29** 41 .57 .20 1.09 52 1.49 .41 3.45** 121 CERCLA/ Contaminated Site 2.33 .78 1.99 34 1.16 .88 2.87** 51 .43 .20 1.30 82 1.04 .43 3.30** 167 Miscellaneous or Multiple Media .49 .42 .68 16 1.97 .68 1.12 24 .20 .03 .49 23 .95 .16 1.42 63

Announcement Type Allegation: Mean Median t-statistic Observations Charges led: Mean Median t-statistic Observations Settlement: Mean Median t-statistic Observations All: Mean Median t-statistic Observations

Air 1.56 .81 2.08* 30 .32 .51 .39 20 .17 .26 .48 77 .52 .48 1.69 127

Total 1.69 .66 3.25** 108 1.58 .72 3.80** 136 .35 .11 1.72 234 1.00 .43 5.12** 478

Note.Average 2-day cumulative abnormal returns for environmental violations reported in the Wall Street Journal or Factiva database during the period 19802000, categorized by the type of environmental harm and the announcement type. Allegation announcements contain information that a violation may have occurred. Announcements of charges led contain information that formal charges were led against the defendant company. Settlement announcements are events in which information about a settlement is included in the initial press report about the violation. Returns are expressed as percentages. CERCLA p Comprehensive Environmental Response, Compensation, and Liability Act. Indicates statistical signicance using a two-tailed test at the .10 level. * Indicates statistical signicance using a two-tailed test at the .05 level. ** Indicates statistical signicance using a two-tailed test at the .01 level.

the rm settled an environmental charge, they also contain the rst press mention indicating that there was an environmental violation in the rst place. Table 2 reports on the average 2-day abnormal stock returns for the initial press announcements of environmental violations for all 478 cases and for each announcement type. The 2-day event window consists of the day before and the day of the initial press report. Abnormal returns are calculated as the actual 2-day return minus a forecast return from a one-factor market model. We estimate the market model using trading days 230 through 31 relative to the initial press date, and we measure market returns using the CRSP equal-weighted index with dividends. Test statistics are calculated using the mean and standard error of the cross section of abnormal returns. Different procedures to calculate the test statisticsfor example, the procedure discussed by Wayne Mikkelson and M. Megan Partchyield quali-

reputational penalties

663

tatively identical results.30 The empirical results also are similar when we use size-adjusted abnormal returns using the method described by Elroy Dimson and Paul Marsh.31 For all 478 initial press announcements, the average 2-day abnormal stock return is 1.00 percent, with a t-statistic of 5.12. The share price effect depends on the type of information contained in the initial announcement. Announcements of allegations and charges led result in mean abnormal stock returns of 1.69 percent and 1.58 percent, respectively, and are statistically signicant at the 1 percent level. The mean abnormal stock return for settlement announcements, in contrast, is smaller in magnitude (.35 percent) and insignicant at the 5 percent level.32 Nonparametric test statistics (not reported in the table) yield the same inferences as those in Table 2. For example, the Wilcoxon signed-rank statistic for all 478 events is 4.77, which indicates that the average abnormal return is negative. Furthermore, the average abnormal return is negative for each category of environmental harm. Differences in the average abnormal return across types of harm are not statistically signicant (the F-statistic equals 1.06, with a p-value of .37). For 55 of the 478 cases, other potentially confounding news about the defendant company was announced in the Wall Street Journal the day before, the day of, or the day after the initial press announcement about the environmental violation. Many of these are routine announcements regarding dividends or earnings reports. Others involve nonroutine announcements regarding asset sales or potential takeover rumors. Omitting these 55 events from the sample does not materially affect the results. The average abnormal return for the remaining 423 events, for example, is 1.15 percent (t p 5.36). We believe that this is the rst large-sample study to examine different types of events to document that news about an environmental violation is indeed costly for rms. Furthermore, the stock value losses are similar for different types of environmental harm, including air emissions, water discharges, and site contamination.
30 Wayne H. Mikkelson & M. Megan Partch, Withdrawn Security Offerings, 23 J. Fin. & Quantitative Analysis 119 (1988). 31 Elroy Dimson & Paul Marsh, Event Study Methodologies and the Size Effect: The Case of UK Press Recommendations, 17 J. Fin. Econ. 113 (1986). 32 Settlement announcements can result in relatively small share value losses for three reasons. First, violations that settle quickly may result in smaller penalties than those that do not settle quickly. Second, settlement announcements may not be the rst news of the violation to reach nancial markets. By construction, all announcements in our sample represent the rst press mention of the violation. But it is possible that information about some of our events leaked before the initial press announcement, particularly when the rst press announcement is of a settlement. And third, settlement announcements contain information that severely reduces investors uncertainty about the size of the penalty. Such information is not released when the initial press announcement is about allegations or charges led.

664

the journal of law and economics

Only the initial press report of a violation causes a signicant stock price reaction. For 102 of the 478 events in our sample, we identied a subsequent article in the Wall Street Journal or Factiva database that contained substantially new information about the matter. The average abnormal 2-day stock return for these 102 subsequent announcements is 1.20 percent, with a t-statistic of 1.00. For 34 of these 102 events, the Wall Street Journal reports a third news story with signicant new developments. The 2-day abnormal return for the 34 third announcements is .39 percent, with a tstatistic of .58. In collecting the data, we also found 21 announcements that indicated that pending environmental charges against a defendant company had been dropped. The mean 2-day abnormal return for these 21 events is positive but not signicantly different from zero. V. Legal Penalties for Environmental Violations

Firms violating environmental rules face several forms of legal penalties, including nes, payments to damaged parties, compliance costs, and cleanup expenses. The amount paid in settlement of a violation frequently is not disclosed. But by searching the Factiva electronic database and hard copies of the Wall Street Journal, we found data on the legal penalties for 148 of the 478 events in the sample. We base our examination of legal penalties on these 148 events. In 107 of these events, the offending rm was ned or ordered to pay monetary damages to an injured party. In 70 events, the rm paid the costs to comply with regulations or remediate prior damage. In 29 events, the rm paid both a ne and a cleanup cost. The top section of Table 3 reports data from the 107 events in which nes were imposed or monetary damages awarded to victims. Although we use current dollar amounts in citing specic examples, the summary statistics in Table 3 are in constant year 2000 dollars. The mean amount awarded is $13.2 million, although most amounts are substantially smaller. The median, for example, is $1.52 million. Although the mean payment levels vary by the type of environmental harm, a one-way analysis of variance indicates that the differences are not statistically signicant. The F-statistic from the analysis of variance is 1.24, with a p-value of .30.33 Defendant companies frequently pay large amounts in nes and damage claims. A typical air emission case, for example, is a $990,000 ne paid by International Paper in 1989 for violations of the Clean Air Act at a Maine paper pulp mill. Examples of nes for water violations include a 1982 Mobil
33 Clean-air violations are associated with the largest mean penalty, $31.7 million. This mean, however, is affected by two settlements that are not typical among the air emission cases and do not reect actions taken under the Clean Air Acts. The rst is Union Carbides $350 million settlement of claims stemming from the December 3, 1984, leak of poison gas from the rms Bhopal, India, pesticide plant, and the second is Monsantos $81.9 million settlement of claims arising from the use of Agent Orange during the Vietnam War. When these unusual cases are omitted, the mean assessed penalty for air emission cases is $4.5 million.

reputational penalties
TABLE 3 Sizes of the Legal Penalties Levied for Environmental Violations, by Type of Environmental Harm
Surface or Drinking Water CERCLA/ Miscellaneous Contaminated or Multiple Site Media

665

Penalty Actual nes and damage awards: Mean Median Observations Actual compliance and cleanup costs: Mean Median Observations

Air

Total

31.7 1.2 26 123.0 27.9 12

4.0 .8 32 36.7 5.7 16

11.0 3.0 32 108.0 18.8 33

6.1 1.5 17 102.0 17.8 9

13.2 1.5 107 93.6 13.5 70

Note.Data on the legal penalties imposed for 148 events in our sample for which penalty data are available in the Wall Street Journal or Factiva database, 19802000. Twenty-nine cases appear in the top and bottom sections because they have both ne and cleanup cost data. Amounts are in millions of constant year 2000 dollars. CERCLA p Comprehensive Environmental Response, Compensation, and Liability Act.

Oil agreement to pay the state of Alabama $2 million for illegally discharging drilling uids into state waters and a 1998 agreement by Shell Oil to pay $1,500,000 to settle Justice Department civil charges arising from the companys chemical discharges into the Mississippi River. The bottom section of Table 3 reports on the 70 events for which we have information on rms estimated costs to comply with regulatory or courtimposed mandates or to clean up environmental damage. In general, compliance and cleanup costs are substantially higher than nes and damage awards. In the 1989 International Paper case, for example, in addition to its $990,000 ne, the rm also agreed to spend $4.2 million to install air pollution control equipment at its Maine plant. In the 1998 Shell Oil case, the company also agreed to perform environmental projects valued at over $10 million along the Mississippi River. As another example, in 1981 Ohio Edison was ned $1.55 million for sulphur dioxide and other emissions at its coal-burning power plants. At the same time, the rm agreed to spend an estimated $367 million to comply with Clean Air Act requirements. Overall, the mean compliance or cleanup cost is $93.6 million, with a median of $13.5 million. Once again, although the mean values differ according to the type of harm, the differences jointly are not statistically signicant (the F-statistic is .40, with a p-value of .75). VI. Reputational Costs for Environmental Violations

In this section, we combine data on market value losses with data on the legal penalties to derive a measure of the reputational cost imposed on environmental violators. To compute the reputational cost, we assume that the

666

the journal of law and economics

initial change in market value is investors unbiased estimate of the total loss to the rm from its environmental violation. This is consistent with our nding, reported in Section IV, that the stock price reaction to the initial announcement captures most of the rms total loss in market value. Some of this loss is attributable to investors expectations that legal penalties will be imposed on the rm. Using a rational expectations assumption, we use the legal penalty eventually imposed as an unbiased estimate of the size of the legal penalty expected at the time of the initial press announcement. If the initial market value loss is no greater than the legal penalty, we infer that the market value loss reects investors expectations of the legal penalty. If the market value loss exceeds the legal penalty, then we attribute the difference to lost reputation. The null hypothesis in these tests is that there is no reputational effect. The alternative is that the reputational effect is negative. We thus conduct one-tailed t-tests to test the null. We have data on legal penalties for 148 of the 478 violations in our sample. The top section of Table 4 reports on the reputation effects in these 148 events and for subsets of these events partitioned by the type of environmental harm. The mean 2-day abnormal stock return for all 148 events is .62 percent. The mean legal penalty for these 148 events is 2.26 percent of the rms market value of equity. That is, the legal penalties by themselves imply a loss of 2.26 percent in market value. The difference between the observed loss and the implied loss from the legal penalties is 1.64 percent. This is our point estimate of the mean reputational effect. The point estimate is positive because the legal penalty, on average, more than explains the market value loss. The point estimate of the reputational effect also is positive for three of the four types of environmental harm. Only for water-related violations is the mean reputational effect negative. Even here, however, the low t-statistic of .18 indicates that we cannot reject the null hypothesis that the reputational loss is zero. The data in the top section of Table 4 include many events in which the initial press report of the environmental violation is of a settlement. As reported in Section IV, the mean stock price reaction to settlement announcements is smaller in magnitude than when the initial press announcement is of an allegation or charges led. It is possible that, for some settlement announcements, information about the violation was previously available to investors. Including these events could bias downward our estimates of the stock price effect of the violation and the reputational loss. In the bottom section of Table 4, we therefore exclude events in which the initial press announcement is of a settlement. For the remaining 50 cases, the mean 2-day abnormal stock return is 1.95 percent. The mean legal penalty for these 50 cases is 1.55 percent of the market value of equity. The difference, .4 percent, is the point estimate of the reputational effect. Using

TABLE 4 Reputational Costs for Environmental Violations, by Type of Environmental Harm


Surface or CERCLA/ Miscellaneous or Drinking Water Contaminated Site Multiple Media .52 .43 .09 .18 41 1.57 .77 .80 .86 17 1.01 1.8 .79 .85 54 3.26 3.46 .20 .06 14 .29 4.48 4.78 1.66 21 .00 .26 .26 .27 10

Air All 148 observations with data on both stock returns and legal penalties: Mean % change in market value Mean implied % change from the legal penalty imposed Mean reputational effect (as % of market value) (row 1 row 2) Reputational effect t-statistic Number of observations Excluding initial announcements that include settlement information: Mean % change in market value Mean implied % change from the legal penalty imposed Mean reputational effect (as % of market value) (row 1 row 2) Reputational effect t-statistic Number of observations .69 3.9 3.21 1.76 32 2.79 1.46 1.32 1.10 9

Total .62 2.26 1.64 2.39 148 1.95 1.55 .4 .4 50

Note.This table compares rms market value losses to their legal penalties. The t-statistics test the null of no reputational effect against the alternative that the effect is negative (that is, that there exists a reputational loss). CERCLA p Comprehensive Environmental Response, Compensation, and Liability Act.

668

the journal of law and economics

this estimate, we would conclude that, on average, the reputational penalty accounts for .4/1.95 percent, or 20.5 percent, of the losses experienced by rms investigated or charged with environmental violations. The t-statistic for the mean reputational effect, however, is only .40. So even for the subsample of events included in the bottom section of the table, the data cannot reject the null hypothesis that the reputational effect is zero. Furthermore, none of the estimates of reputational effect are statistically signicant for any of the four types of environmental harm. The lack of evidence of a reputational penalty is even more notable considering that our measure of the legal penalty ignores some of the explicit costs many rms face. Such costs typically include attorneys fees, court costs, managers time, and any lost prots from forgoing the activity that triggered the environmental charges in the rst place. If we were to include such costs, the portion of the market value loss that we could attribute to lost reputation would be smaller than reported in Table 4. The fact that our estimates of the reputational effect are not signicantly different from zero even excluding these other explicit costsserves further to support the conclusion that rms do not on average experience reputational losses when they violate environmental regulations. These results are notable also because they differ from the estimates of large reputational losses reported for product recalls, false advertising, unsafe services, frauds, punitive damages lawsuits, defense procurement frauds, and nancial misrepresentation (see the footnotes in Section IIA). The fact that reputational penalties are found for other types of corporate wrongdoing indicates that our results are not due to low-powered tests. Rather, the results indicate that environmental violations differ from other types of wrongdoing in one important respect: rms that violate environmental regulations typically do not impose direct harms on their customers, employees, suppliers, or other stakeholders. Reputational penalties are negligible in such cases because there are no repeat market transactions through which the violations costs are internalized by the rm. VII. A. Extensions

The Cross-Sectional Relation between Abnormal Returns and the Legal Penalty

In this section, we investigate whether cross-sectional differences in the stock price reactions are related to the legal penalty. Table 5 reports the results of robust least squares regressions using White-corrected standard errors to correct for the presence of heteroskedasticity. The dependent variable is the rms 2-day abnormal stock return. The independent variables include dummy variables for allegation and charges led announcements (leaving settlement announcements to be reected in the intercept term), plus (1) a

reputational penalties

669

dummy variable set equal to one if we have information that a ne was imposed on the company, (2) the amount of the ne when a ne is imposed (this variable is zero for rms for which we do not have ne data), (3) a dummy variable set equal to one if we have information that compliance or remediation costs were imposed on the company, and (4) the amount of the compliance or remediation cost (this variable is zero for rms for which we do not have cleanup cost data). The results using data on all 478 events in the sample are reported in model 1 of Table 5. The coefcients for allegation and charges led announcements are negative and statistically signicant, consistent with our previous ndings that abnormal returns are most negative for these types of announcements. The negative coefcient for the ne amount (t-statistic p 2.81) indicates that the abnormal stock return is signicantly and negatively related to the size of the ne. The abnormal stock return is not signicantly related to the size of the cleanup cost imposed on the rm. Model 2 reports the results using data from only the 148 events for which we have data on the legal penalties. The results are similar to those in model 1. Thus, rms losses in share values are related to the size of the ne or damage award eventually imposed by regulators or the courts. This is consistent with our nding that legal penalties are important in disciplining environmental violations. Not only is the average share value loss explained by the average legal penalty, but in the cross section, the share value loss is related to the legal penalty at the rm level. Furthermore, it is the ne amount, not the cleanup cost, that seems to matter in explaining the share value loss. In results not reported, we nd that the abnormal stock return is not signicantly related to other characteristics of the violation, including the type of environmental harm, the type of action, or the identity of the party bringing the action. In all of these tests, the abnormal stock return is signicantly related to the size of the ne or damage award eventually imposed on the company. This is consistent with the conclusion that rms share value losses reect primarily their expected future legal penalties. B. Potential Legal Penalties

Information on the legal penalties is available for only 148 of the 478 events in the sample. For many additional events, however, press reports provide information on the sizes of penalties that could be imposed. For example, in 1987 the U.S. Justice Department led a civil lawsuit seeking damages from Browning-Ferris Industries for hazardous waste violations at a Louisiana facility. Press reports at the time speculated that Browning-Ferris could pay $70 million in damages. We found speculation on such potential penalties for 212 events in our sample. As might be expected, the potential penalties are much higher than the actual penalties reported in Table 3. The

670

the journal of law and economics


TABLE 5 Cross-Sectional Relations between Share Value Losses and Legal Penalties

Independent Variable Allegation announcements (#102) Charges led announcements (#102) Type and cost of legal penalty imposed: Dummy variable equal to 1 when ne or damage award information is available Dollar amount of the ne or damage award divided by the market value of rm equity Dummy variable equal to 1 when compliance or cleanup cost information is available Dollar amount of the cleanup cost divided by the market value of rm equity Intercept F-value p-value R2

Model 1 1.33 (2.19)* 1.19 (2.50)* .00353 (.76) .2660 (2.81)** .00118 (.19) .0217 (1.06) .0041 (1.28) 3.69 .001 .028

Model 2 2.29 (1.53) 1.70 (2.22)* .00207 (.17) .0275 (3.01)** .00541 (.44) .0179 (.93) .0053 (.37) 2.84 .012 .079

Note.Least-squares estimates in which the dependent variable is the 2-day announcement period abnormal stock return. Model 1 data consist of all 478 events in the sample. Model 2 data consist of 148 events for which we have information on legal penalties. Values in parentheses are t-statistics, calculated using Whites robust estimator to correct for heteroskedasticity. * Indicates statistical signicance using a two-tailed test at the .05 level. ** Indicates statistical signicance using a two-tailed test at the .01 level.

mean potential ne or damage award is $122 million, and the mean potential cleanup cost is $120 million. The effect of using these data on potential penalties is to further undermine any empirical basis for a reputational cost. This is because the potential penalties are much larger than the rms losses in share values. Hardly ever, however, is the actual penalty as large as the potential penalty. In the Browning-Ferris case cited above, the rm eventually paid $2.5 million, not $70 million. For 28 events in our sample, we have data on both the size of the potential penalty, as it was discussed in press accounts, and the size of the actual penalty when it subsequently was reported. The mean reported potential ne for these 28 cases, in constant year 2000 dollars, is $3.14 billion, whereas the mean actual ne eventually imposed is only $33.7 million. The median potential ne is $9.5 million, and the median actual ne is $4.0 million. These data suggest that it is inappropriate to use potential penalties as proxies for investors expectations of the actual penalties imposed.

reputational penalties C. Sample Selection Bias

671

Our sample is selected from environmental violations reported in the Wall Street Journal, with follow-up information collected from the Factiva database. This biases our sample toward violations that the Wall Street Journal editors deem newsworthy. Anecdotal evidencefor example, the tendency to include the stock price change in the storysuggests that events with large valuation consequences are likely to be deemed newsworthy. Thus, the sample is likely to be slanted toward events with large stock price reactions. These are precisely the events for which we would expect to measure larger reputational costs. The fact that we do not nd evidence of large reputational costs further supports the inference that such costs are not signicant for environmental violations. VIII. Conclusions

Debate over environmental policy frequently occurs amidst a vacuum of empirical evidence. Little is known about the sizes of the penalties imposed on rms that violate environmental regulations and whether such penalties are imposed by regulators or market forces. If signicant penalties are imposed by the marketfor example, through customers or suppliersthen legal penalties can be redundant and more easily lead to overdeterrence. In this paper we address these issues by providing empirical evidence on the market and legal penalties imposed on companies that violate environmental regulations. Our data cover a total of 478 events for 19802000 in which rms were investigated, convicted, or cited for environmental violations. We nd that rms investigated or charged with violating environmental rules experience statistically signicant and economically meaningful decreases in common share values. For announcements of alleged environmental violations, the average abnormal stock return is 1.69 percent, with a t-statistic of 3.25. For announcements that charges have been led against the rm, the average abnormal stock return is 1.58, with a t-statistic of 3.80. This constitutes the rst large-sample evidence that news of an environmental violation corresponds to a loss in share value. The loss in share value, while signicant, is not on average larger than the legal penalties imposed on the violating rm. This implies that the share value losses are due to prospective legal penalties rather than to any reputational costs. Thus, unlike such other types of corporate wrongdoing as criminal fraud and product safety problems, reputational concerns are not a sizeable deterrent to environmental violations. Rather, the primary deterrence occurs through regulatory and legal penalties. Consistent with this interpretation, we also nd that the size of the initial stock price reaction is related to the regulatory ne that eventually is imposed.

672

the journal of law and economics Bibliography

Afsah, Shakeb, Laplante, Benoit; and Wheeler, David. Controlling Industrial Pollution: A New Paradigm. Policy Research Working Paper No. 1672. Washington, D.C.: World Bank, 1996. Alexander, Cindy R. On the Nature of the Reputational Penalty for Corporate Crime: Evidence. Journal of Law and Economics 42 (1999): 489526. Arora, Seema. Voluntary Abatement and Market Value: An Event Study Approach. Unpublished manuscript. Stanford, Calif.: Stanford Institute for Economic Policy Research, 2001. Arora, Seema, and Cason, Timothy N. Why Do Firms Volunteer to Exceed Environmental Regulations? Understanding Participation in EPAs 33/50 Program. Land Economics 72 (1996): 41332. Badrinath, S. G., and Bolster, Paul J. The Role of Market Forces in EPA Enforcement Activity. Journal of Regulatory Economics 10 (1996): 16581. Barde, Jean-Philippe. Environmental Policy and Policy Instruments. In Principles of Environmental and Resource Economics: A Guide for Students and Decision-Makers, edited by Henk Folmer and H. Landis Gabel, pp. 157200. Cheltenham: Edward Elgar Publishers, 2000. Becker, Gary S. Crime and Punishment: An Economic Approach. Journal of Political Economy 76 (1968): 169217. Carlton, Dennis W., and Loury, Glenn C. The Limitation of Pigouvian Taxes as a Long-Run Remedy for Externalities. Quarterly Journal of Economics 95 (1980): 55966. Carlton, Dennis W., and Loury, Glenn C. The Limitation of Pigouvian Taxes as a Long-Run Remedy for Externalities: An Extension of Results. Quarterly Journal of Economics 101 (1986): 63134. Cohen, Mark A. Optimal Enforcement Strategy to Prevent Oil Spills: An Application of a Principal-Agent Model with Moral Hazard. Journal of Law and Economics 30 (1987): 2351. Cohen, Mark A. Environmental Crime and Punishment: Legal/Economic Theory and Empirical Evidence on Enforcement of Federal Environmental Statutes. Journal of Criminal Law and Criminology 82 (1992): 10541108. Cohen, Mark A. Monitoring and Enforcement of Environmental Policy. In International Yearbook of Environmental and Resource Economics, Vol. 3, edited by Tom Tietenberg and Henk Folmer, pp. 44106. Cheltenham: Edward Elgar Publishers, 1999. Dasgupta, Susmita; Laplante, Beniot; and Mamingi, Nlandu. Pollution and Capital Markets in Developing Countries. Journal of Environmental Economics and Management 42 (2001): 31035. Decker, Christopher S. Corporate Environmentalism and Environmental Statutory Permitting. Journal of Law and Economics 46 (2003): 10329.

reputational penalties

673

Dimson, Elroy, and Marsh, Paul. Event Study Methodologies and the Size Effect: The Case of UK Press Recommendations. Journal of Financial Economics 17 (1986): 11342. Doonan, Julie; Lanoie, Paul; and Laplante, Benoit. Environmental Performance of Canadian Pulp and Paper Plants: Why Some Do Well and Others cole des Hautes E tudes Do Not? Unpublished manuscript. Montre al: E Commerciales, 2002. Downing, Paul B., and Kimball, James N. Enforcing Pollution-Control Laws in the United States. Policy Studies Journal 11 (1982): 5565. Fiorelli, Paul E., and Rooney, Cynthia J. The Environmental Sentencing Guidelines for Business Organizations: Are There Murky Waters in Their Future? Boston College Environmental Affairs Law Review 22 (1995): 481502. Gupta, Shreekant, and Goldar, Bishwanath. Do Stock Markets Penalise Environment-Unfriendly Behaviour? Evidence from India. Unpublished manuscript. Delhi: Delhi School of Economics, Centre for Development Economics, 2003. Hamilton, James T. Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory Data. Journal of Environmental Economics and Management 28 (1995): 98113. Hamilton, James T. Going by the (Informal) Book: The EPAs Use of Informal Rules in Enforcing Hazardous Waste Laws. In Advances in the Study of Entrepreneurship, Innovation, and Economic Growth, Vol. 7, Reinventing Government and the Problem of Bureaucracy, edited by Gary D. Libecap, pp. 10955. Boston: JAI Press, 1996. Harper, Richard K., and Adams, Stephen C. CERCLA and Deep Pockets: Market Response to the Superfund Program. Contemporary Economic Policy 14 (1996): 10715. Heinkel, Robert; Kraus, Alan; and Zechner, Josef. The Effect of Green Investment on Corporate Behavior. Journal of Financial and Quantitative Analysis 36 (2001): 43149. Henriques, Irene, and Sadorsky, Perry. The Determinants of an Environmentally Responsive Firm: An Empirical Approach. Journal of Environmental Economics and Management 30 (1996): 38695. Jarrell, Gregg, and Peltzman, Sam. The Impact of Product Recalls on the Wealth of Sellers. Journal of Political Economy 93 (1985): 51236. Jones, Kari, and Rubin, Paul H. Effects of Harmful Environmental Events on Reputations of Firms. In Advances in Financial Economics, Vol. 6, edited by Mark Hirschey, Kose John, and Anil Makhija, pp. 16182. Amsterdam: Elsevier, 2001. Karpoff, Jonathan M., and Lott, John R., Jr. The Reputational Penalty Firms Bear from Committing Criminal Fraud. Journal of Law and Economics 36 (1993): 757802. Karpoff, Jonathan M., and Lott, John R., Jr. On the Determinants and Im-

674

the journal of law and economics

portance of Punitive Damages Awards. Journal of Law and Economics 42 (1999): 52773. Karpoff, Jonathan M.; Lee, D. Scott; and Martin, Gerald S. The Cost of Cooking the Books. Working paper. College Station: Texas A&M University; Seattle: University of Washington, 2004. Karpoff, Jonathan M.; Lee, D. Scott; and Vendrzyk, Valaria. Defense Procurement Fraud, Penalties, and Contractor Inuence. Journal of Political Economy 107 (1999): 80942. Klassen, Robert D., and McLaughlin, Curtis P. The Impact of Environmental Management on Firm Performance. Management Science 42 (1996): 11991214. Klein, Benjamin, and Lefer, Keith B. The Role of Market Forces in Assuring Contractual Performance. Journal of Political Economy 89 (1981): 61541. Konar, Shameek, and Cohen, Mark A. Why Do Firms Pollute (and Reduce) Toxic Emission? Working paper. Nashville: Vanderbilt University, Owen Graduate School of Management, 1998. Konar, Shameek, and Cohen, Mark A. Does the Market Value Environmental Performance? Review of Economics and Statistics 83 (2001): 28189. Lanoie, Paul, and Laplante, Benoit. The Market Response to Environmental Incidents in Canada: A Theoretical and Empirical Analysis. Southern Economic Journal 60 (1994): 65772. Laplante, Benoit; Lanoie, Paul; and Roy, Maite . Can Capital Markets Create Incentives for Pollution Control? Ecological Economics 26 (1998): 3141. Magat, Wesley A., and Viscusi, W. Kip. Effectiveness of the EPAs Regulatory Enforcement: The Case of Industrial Efuent Standards. Journal of Law and Economics 33 (1990): 33160. Mikkelson, Wayne H., and Partch, M. Megan. Withdrawn Security Offerings. Journal of Financial and Quantitative Analysis 23 (1988): 11943. Mitchell, Mark L. The Impact of External Parties on Brand-Name Capital: The 1982 Tylenol Poisonings and Subsequent Cases. Economic Inquiry 27 (1989): 60118. Mitchell, Mark L., and Maloney, Michael T. The Role of Market Forces in Promoting Air Travel Safety. Journal of Law and Economics 32 (1989): 32955. Muoghalu, Michael; Robison, H. David; and Glascock, John L. Hazardous Waste Lawsuits, Stockholder Returns, and Deterrence. Southern Economic Journal 7 (1990): 35770. Oljaca, Neda; Keeler, Andrew; and Dorman, Jeffrey. Penalty Functions for Environmental Violations: Evidence from Water Quality Enforcement. Journal of Regulatory Economics 14 (1998): 25564. Pargal, Sheoli, and Wheeler, David. Informal Regulation in Developing Countries: Evidence from Indonesia. Journal of Political Economy 104 (1996): 131427.

reputational penalties

675

Peltzman, Sam. The Effects of FTC Advertising Regulation. Journal of Law and Economics 24 (1981): 40348. Porter, Michael E., and van der Linde, Claas. Toward a New Conception of the Environment-Competitiveness Relationship. Journal of Economic Perspectives, Fall 1995, pp. 97118. Shabecoff, Philip. Six Groups Urge Boycott of Exxon. New York Times, May 3, 1989. Smith, Clifford, Jr. Economics and Ethics: The Case of Salomon Brothers. Journal of Applied Corporate Finance 5, No. 2 (1992): 2328. U.S. Sentencing Commission. Report from Advisory Group on Environmental Sanctions. Washington, D.C.: U.S. Sentencing Commission, 1993. http://www.ussc.gov/publicat/environ.pdf. Zerbe, Piotr M. Evaluation of Predominant Environmental Management Practices in the Canadian Pulp and Paper Industry. Working paper. Vancouver: University of British Columbia, Department of Resource Management and Environmental Studies, 1997.