Does a firm's pollution harm its reputation? Many people think so, arguing that customers and suppliers are less willing to do business with companies that are not environmentally responsible. But recent research by Jonathan Karpoff, John Lott Jr., and Eric Wehrly (2005) presents compelling evidence that this is not so: The only adverse consequences suffered by firms who violate environmental regulations stem from the ensuing legal penalties and cleanup and compliance costs.

Conventional wisdom argues that when firms violate environmental rules, customers and suppliers who value environmental amenities will punish the polluters through the marketplace. Some customers, for example, will stop doing business with polluters, while potential employees may refuse to work for them, and suppliers may even decline to sell their goods to them. Hence, it is argued, polluters will face lower revenues and higher costs. The resulting lower profits are called a "reputational penalty." For a publicly owned polluter, any such reputational penalty should be manifest in a lower share price for the company's stock (Klein and Leffler 1981).

To determine whether firms suff er reputational penalties when they violate environmental laws and regulations, Karpoff et al. examined the consequences of 478 environmental violations by publicly traded companies for the years 1980 to 2000. They found that although the companies' share prices dropped measurably (about 1.5 to 2 percent) when the companies were charged with such violations, all of this decline is attributable to the direct legal penalties and the remediation and compliance costs imposed on them by regulators. Because the firms' stock prices did not fall in excess of the legal penalties, the researchers concluded that the firms' reputations were unsullied. . . .


Blogger Zendo Deb said...

That analysis seems to limited to short-term vs. long-term consequences.

So the value of the stock falls in the short term commensurate with the legal penalties. This only implies that Wall Street is looking only at the financial impacts.

What if in the long term - and I mean even over months/years those Americans who are moved to consider environmental issues refuse to do business with said company? Won't this impact their stock price in the long run? They stock may go up, but did the grow the top line as fast as they could have or were they swimming against something.

For Example.... certain compaines provide funds to gun-control nuts. While I have list somewhere, the one I am most familiar with is Sara Lee foods. I refuse to buy their products - given that there deli meat business is fairly successful, this is a challenge. I also make clear - from time to time - that other people who value their rights under the 2nd Amendment would do well to note this about Sara Lee as well.

Conversely Amheiser-Busch is a fairly good supporter of the 2nd Amendment - they pulled funding to an incumbent governor because said politico opposed a concealed carry law. I went out of my way to find a product of theirs I like - I can recommend Amber Boch to all my foreign-beer drinking friends.

Not very many people are actively looking at the impact of how their money is spent, but more and more people are. (Ask Hollywood if you doubt it.)

9/28/2006 1:13 PM  

Post a Comment

Links to this post:

Create a Link

<< Home