Corporate environmental liabilities’ impact on companies’ stock returns

Abstract

This study examines the financial implications of corporate environmental violations on stock returns within the U.S. market, focusing on the market's reaction to disclosure events. Using data from the EPA's ECHO database and Refinitiv's financial data, an event study methodology is employed to assess the impact of environmental violation announcements on cumulative abnormal returns (CAR). The findings reveal significant negative reactions in stock returns following such announcements, suggesting that investors respond unfavorably to companies' environmental infractions, particularly when penalties are high. Regression analysis further identifies that firm size, profitability, and penalty severity are critical determinants of CAR, underscoring the market's sensitivity to environmental non-compliance. This study contributes to the literature by demonstrating the tangible financial consequences of regulatory non compliance, highlighting the importance of sustainable practices for corporate financial stability.