Title: How bad is bad news? Assessing the effects of environmental incidents on firm value

Authors: Tommy Lundgren, Rickard Olsson

Addresses: Centre for Environmental and Resource Economics, Umea School of Business, Umea University, 901 87 S-Umea, Sweden. ' Umea School of Business, Umea University, 901 87 S-Umea, Sweden

Abstract: Based on a formal model of how investments in corporate social responsibility act upon firm value through goodwill, we derive the hypothesis that under uncertainty bad news are detrimental to goodwill, and subsequently have a negative impact on value. We examine by event study methodology whether bad news in the form of environmental (EV) incidents affect firm value negatively as measured by abnormal returns using a global data set. An EV incident is a company incident allegedly in violation of international norms on environmental issues. We analyse 142 EV incidents 2003-2006. The EV incidents are generally associated with loss of value, but which are not statistically significant, except for incidents for firms in Europe. Furthermore, results indicate that firms with low goodwill capital (high EV risk rating) are associated with relatively larger negative abnormal returns in case of an EV incident.

Keywords: abnormal returns; corporate social responsibility; CSR investment; event study; environmental incidents; firm value; uncertainty; bad news; goodwill.

DOI: 10.1504/AJFA.2009.031774

American Journal of Finance and Accounting, 2009 Vol.1 No.4, pp.376 - 392

Published online: 23 Feb 2010 *

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