How Do Stockholders Behave at the Onset of Major Crises? Attribution and Reputation over Decades

Abstract

Studies have documented a reputational loss for firms found guilty of rule violations. To determine if stockholders also punished US listed firms following 274 major crises, we create three groups of events based on attribution of responsibility. The average wealth loss and the proportion of negative reactions following crises largely depend on the attribution level. The negative reaction is reversed for non-attributed crises but persists for attributed crises. These results are consistent with the attribution theory proposition that only attributed crises cause reputational damage. Further, this reputational loss has been stable for six decades.

Keywords:

• Attribution
• Reputation
• Crisis
• Stockholder behavior
• Terrorist attack

JEL CLASSIFICATION CODES:

• G14
• G41
• G32

Disclosure statement

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Notes

1 The 1989 Exxon Valdez oil spill court case ended in 2008 with a Supreme Court decision. Court cases involving the 1984 Bhopal disaster were still open in 2012. Lee, Garza-Gomez, and Lee (2018) illustrate the complexity of cost estimates in the case of the 2010 Deepwater Horizon oil spill.

2 This event illustrates the very light sentences that can be levied upon major polluters compared with their earnings or capitalization. In June 2008, the US Supreme Court reduced what had once been $5 billion in punitive damages against ExxonMobil to about $500 million related to the Exxon Valdez spill in Alaska in 1989. Exxon reported total earnings of about $30 billion in 2010. Other examples abound. In March 2010, the Paris Court of Appeal handed down its judgment on the wreck of the Erika and the subsequent pollution, which occurred in 1999. The Erika was last chartered by Total-Fina-Elf. Total was found to be at fault for their implementation of a vessel vetting process and was ordered to pay a fine of €375,000. However, the Court of Appeal decided that Total was not liable for the civil damages awarded to the plaintiffs. The company reported net income of about €14 billion in 2010. Thousands of people died in the immediate aftermath of the Bhopal accident, and the Supreme Court of India ordered a final settlement of $470 million for all Bhopal litigation. Union Carbide paid $420 million in 1989. Its revenue was slightly more than $8 billion in 1988.

3 For example, the report to the President by the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, entitled “The Deepwater: The Gulf Oil Disaster and the Future of Offshore Drilling,” was released in January 2011, about nine months after the April 20, 2010 explosion, and is 398 pages long. Following the explosion of Flight TWA 800 in 1996, the FBI and the Joint Terrorism Task Force of the New York Police Department initiated criminal investigations. They found no evidence of a criminal act. The National Transportation Safety Board concluded its four-year investigation with the approval of the Aircraft Accident Report in 2000. (https://en.wikipedia.org/wiki/TWA_Flight_800).

4 We selected only the firm that was mainly cited in newspapers when several firms were involved in a crisis. For example, BP is generally associated with the Deepwater Horizon oil spill. This company assumed most of the costs of that event. Even if some crises appeared several times on the front page of The New York Times, we retain only the first mention of these crises.

5 For example, a train derails and it is unclear if the rail operator or the railway owner is at fault.

6 In the air transportation industry, insurance is mandatory. In other sectors, several firms self- insure, mainly using captive insurance companies. The 9/11 attacks motivated US primary insurers to exclude terrorism coverage from most commercial airlines’ insurance policies. In November 2002, the Federal Terrorism Risk Insurance Act (TRIA) provided a federal reinsurance backstop for terrorism events, which was extended several times, most recently until 2027. Approximately 60% of US businesses have terrorism insurance: https://www.iii.org/article/does-my-business-need-terrorism-insurance.

7 https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html