Stock Market and Deterrence Effect : A Long-Run Analysis of Major Environmental and Non-Environmental Disasters

Based on an original sample of 170 events reported on the front page of the New York Times during half a century, we analyze the mid- and long-run effects of major industrial disasters on shareholders' wealth. Environmental crises have a stronger negative effect during the weeks following the events than non-environmental crises, but both groups induce huge market losses. We focus on the long-run effect because institutional investors, who own the majority of shares, generally have long investment horizons. Controlling for several dimensions, we evidence large market losses reaching billions of dollars, on average, during the first year following the disaster. Environmental crises are associated with smaller effects when expressed in abnormal returns, but costs in dollars are higher than for the other crises, because firms involved are larger. In the long run, the market induces a significant deterrence effect, mainly when the crises are followed by government intervention