Wednesday, December 23, 2009

News Media as a Channel of Environmental Information Disclosure: Evidence from an EGARCH Approach

I am a coauthor of a new working paper that uses an event study methodology to look at the impact of bad environmental news on the stock returns of U.S. listed firms. The lead author, Ran Zhang, is one of my former students at RPI. The paper is based on a chapter of her dissertation. My role in the paper was suggesting the original topic to Ran, providing feedback at various stages, and doing a lot of work on writing and editing this version.

A stock market event study tests whether stock returns are greater than would normally be expected in the period following a particular event in this case the release of bad environmental news. The topic itself isn't novel but our study adds the following value:

1. We use a larger sample than previous reliable studies of this issue. Large samples help us get more accurate estimates of effects. Filbeck and Gorman use a larger sample, but they do not seem to have cleaned up the data to remove "confounding events". When other important events happen in the same time window as the environmental news event we are interested in, we can't tell using daily data whether any change in stock prices is due to our event of interest or the confounding event. The confounding events swamp the signal with noise. Filbeck and Gorman only found a significant impact on stock prices from news of environmental awards. This doesn't mean that other news has no effect on stock prices. Simply that they couldn't isolate that effect.

2. As well as using traditional ordinary least squares estimation of the model we use an E-GARCH approach that can deal with the tendency of extreme returns in the stock market to cluster. Contrary to previous research we find that the results are robust to using either OLS or E-GARCH.

3. We measure the size of effects for different types of news and in different industrial sectors. Accidents and complaints are associated with 2.0% estimated mean reductions in stock market value, whereas lawsuits are associated with 1.5% reductions and court rulings and fines with 0.8% reductions. Transportation equipment and petroleum refining firms experience mean reductions in value of near 2.0%, versus 1.6% in chemicals firms, 0.8% in electric, gas, and sanitary services firms, and 0.7% in other firms. The mean effect across all industries and news types was 1.3%.


G. Filbeck and R. F. Gorman, The stock-price reaction to environmentally-related company news, Journal of Business and Public Affairs 29 (2004) 25-31.

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