Unexpected Media Coverage and Stock Market Outcomes: Evidence from Chemical Disasters
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Unexpected Media Coverage and Stock Market Outcomes: Evidence from Chemical Disasters? Marie-Aude Laguna Université Paris I Panthéon-Sorbonne March 2009 Abstract Using the event-study methodology and multivariate regressions, this paper examines the intensity of media coverage, its determinants and its marginal effect on stock returns following chemical disasters. To do this, we build an original dataset of chemical explosions that occurred worldwide from 1990-2005. First, our results show that news coverage increases with the social and environmental consequences of the accident. Second, to deal with the fact that news coverage is determined simultaneously with stock returns, we suggest two valid and original instrumental variables: a measure of the firm's newsworthiness and a measure of daily news pressure at the time of the disaster. We find that unexpected news coverage due to chemical disasters also respond to these conjunctural factors, and is truly exogenous to abnormal returns. Third, we show that, all else being equal (pollution, number of casualties, and firm profile), the stock market reaction to intense press coverage is delayed, and becomes negative in the long-term. At the same time, there is clear evidence that in the first days news coverage mitigates the market value losses. We interpret these results as evidence that investors are slow to recognize the extent of the loss associated with the public implications of news coverage (e.
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Unexpected Media Coverage and Stock Market Outcomes: Evidence from Chemical Disasters? Marie-Aude Laguna Université Paris I Panthéon-Sorbonne March 2009 Abstract Using the event-study methodology and multivariate regressions, this paper examines the intensity of media coverage, its determinants and its marginal effect on stock returns following chemical disasters. To do this, we build an original dataset of chemical explosions that occurred worldwide from 1990-2005. First, our results show that news coverage increases with the social and environmental consequences of the accident. Second, to deal with the fact that news coverage is determined simultaneously with stock returns, we suggest two valid and original instrumental variables: a measure of the firm's newsworthiness and a measure of daily news pressure at the time of the disaster. We find that unexpected news coverage due to chemical disasters also respond to these conjunctural factors, and is truly exogenous to abnormal returns. Third, we show that, all else being equal (pollution, number of casualties, and firm profile), the stock market reaction to intense press coverage is delayed, and becomes negative in the long-term. At the same time, there is clear evidence that in the first days news coverage mitigates the market value losses. We interpret these results as evidence that investors are slow to recognize the extent of the loss associated with the public implications of news coverage (e.
- large companies
- news coverage
- media coverage
- social cost
- unexpected media
- chemical disasters
- affect stock prices
- public image
- stock returns
Unexpected Media Coverage and Stock Market Outcomes: Evidence from Chemical Disasters∗
Marie-Aude Laguna Université Paris I Panthéon-Sorbonne
March 2009
Abstract
Using the event-study methodology and multivariate regressions, this paper examines the intensity of media coverage, its determinants and its marginal effect on stock returns following chemical disasters. To do this, we build an original dataset of chemical explosions that occurred worldwide from 1990-2005.First, our results show that news coverage increases with the social and environmental consequences of the accident.Second, to deal with the fact that news coverage is determined simultaneously with stock returns, we suggest two valid and original instrumental variables: a measure of the firm’s newsworthiness and a measure of daily news pressure at the time of the disaster. We find that unexpected news coverage due to chemical disasters also respond to these conjunctural factors, and is truly exogenous to abnormal returns.Third, we show that, all else being equal (pollution, number of casualties, and firm profile), the stock market reaction to intense press coverage is delayed, and becomes negative in the long-term. At the same time, there is clear evidence that in the first days news coverage mitigates the market value losses. We interpret these results as evidence that investors are slow to recognize the extent of the loss associated with the public implications of news coverage (e.g., image and public trust deterioration). In addition, in contrast to previous studies, we argue that press coverage is not necessarily associated with increased investor attention.
Classification code:G12, G14, G30, M30. Keywords:Social Responsibility, Pollution, Media, Efficient Market Hypoth-Corporate esis, Behavioral Finance. Address for correspondence:Université Paris I Panthéon-Sorbonne, 106-112, bd de l’hôpital 75013 Paris, marie-aude.laguna@univ-paris1.fr
∗ Isupport from the French Agency of Environment and Energy (ADEME) is greatly acknowledged.Financial would like to thank Gunther Capelle-Blancard, Thierry Chauveau, Bernard Sinclair-Desgagné, Sandrine Lardic, and Sandrine Spaeter, as well as seminar participants at the the ZEW, the Paris School of Economics lunch-Seminar on Applied Microeconomics (SIMA), the University of Paris I Seminar on Money, Banking, Finance, and Insurance (MBFA), the 2008 EEA-ESEM Annual Congress, the 2008 Canadian Economic Association Annual Congress, and the 2008 Société Canadienne Sciences Économiques Congress. I also thank Richard Jonathan for editorial assistance. The usual disclaimer applies.
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1 Introduction
Over the last three decades, we have witnessed several environmental disasters. In many cases, large companies were involved. Union Carbide was responsible for the Bhopal explosion in 1984, Exxon for the Valdez oil spill in 1989, and BP for a large chemical explosion in Texas in 2005. All these events, which provoked either numerous deaths or serious pollution, were followed by enormous news coverage. It is commonly assumed that environmental disasters deteriorate the firm’s public image and its reputation. Stock market value and public image are often considered as the two major motives that may induce firms to reduce the negative externalities they create. According to some, these two motives may complement, or even substitute for, the incentives provided by public regulation.1 To be effective, incentives coming from the stock market or from the public need to be ex-post credible, systematic, and proportional to the social cost entailed. Moreover, it is evident that reliable information about the firm environmental record is needed to discipline corporate behav-ior. Finally, concerning the reaction of stock markets, the incorporation of news about pollution and the social consequences of accidents into prices relies on the efficient market hypothesis, which rests upon strong assumptions about the cognitive abilities of investors. In this article, we investigate the intensity of media coverage, its determinants and its marginal effect on stock returns following chemical disasters. More specifically, we wonder whether intense news coverage after an environmental disaster represents an additional cost to the firm. The drop in stock returns is used as a measure of uninsured cost, while media coverage is taken as a proxy for public image deterioration suffered by the firm. Moreover, we investigate the following questions. Are stock market and media response proportional to the social cost of the accident? Are pollution and safety news correctly incorporated into stock prices? What is the mechanism through which media influence stock markets after an accident? Is intensity of media coverage a good proxy for reputation damage? To our knowledge, virtually no empirical study has examined this issue. To carry out our analysis, we build an original sample of explosions in chemical plants and refineries worldwide from 1990 to 2005. The software Factiva was used to search in a systematic way for the press articles mentioning companies responsible for disasters. Also, this search allowed us to build a number of variables of interest measuring the social consequences of each disaster, such as the number of fatalities and injuries and the occurrence of pollution. The consequences on reputation of news coverage has been the subject of recent papers in the literature. For instance, Kyanazeva (2007) finds that media plays a disciplinary role on executives. Besides, in political science, media coverage is usually considered as a good proxy for public concern. In our study, this effect is particularly important. If the space devoted to chemical disasters in the media is a good indicator of its importance for the public, it may convey information about its legal consequences (clean-up cost, penalties, etc.) and might even indicate law reinforcement in the future (Kahn, 2007). In environmental economics, a number of event-studies show that stock prices incorporate the loss associated with pollution and industrial disaster news, and might confirm the credibility of stock market penalties as a disciplinary motive (for a survey see Margoliset al. they limit their attention to short-term results (a, 2007). But, few days after the announcement date), and largely ignore the ability of media to shape the informational environment of firms (Busheeet al., 2007).2 1in a survey conducted by PriceWaterhouseCoopers among French firms, 90% of the managersFor example, cite public image as the main motivation to promote corporate social responsability inside the firm. See also McKinsey (2006, 2008). 2reaction to the TRI announcement, Hamilton (1995) also intendsIn a seminal study about the stock market to control for media coverage. He shows that whether the firms’ pollution records received media coverage did
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