Abstract
This article makes first use of a set of databases that are authoritative, independent, and consistent to examine an old research question: do firms hurt their financial performance by damaging stakeholder interests? The databases are US government on-line listings of fines for environmental breaches, unsafe workplaces, fraudulent accounting standards, and product recalls. These measures are assumed to proxy for signals to stakeholders of the environmental, social, and governance (ESG) risks in transacting with the firm and appear to have fewer biases than conventional measures of stakeholder standards. Using a sample of all non-financial S&P 500 firms during the most recent 1998–2003 full cycle in the market, after controlling for firm-specific differences, sales margins of firms fell by 0.8% if they announced a product recall and by 0.4% if cited by OSHA for an unsafe workplace; and shareholder return was significantly reduced by an EPA or SEC prosecution. This study links the risk of transaction uncertainty, information signaling theory, and the resource-based view of the firm to company financial performance. Results support the normative assumption that a firm’s sales margin will be damaged by unethical treatment of stakeholders as evidenced by ESG breaches, presumably because risk-averse customers and suppliers are alert to signals of counterparty risk.
Similar content being viewed by others
References
Abbott, L. J., Y. Park and S. Parker: 2000, ‘The effects of audit committee activity and independence on corporate fraud’, Managerial Finance 26 (11), 55-67.
Ang, A., J. Chen and Y. Xing: 2006, ‘Downside Risk’, The Review of Financial Studies 19 (4), 1191-1239.
Bansal, P. and T. Hunter: 2003, ‘Strategic Explanations for the Early Adoption of ISO 14001’, Journal of Business Ethics 46 (3), 289-299.
Barnett, M. L.: 2007, ‘Stakeholder Influence Capacity and the Variability of Financial Returns to Corporate Social Responsibility’, The Academy of Management Review 32 (3), 794-816.
Bartel, A. P. and L. G. Thomas: 1987, ‘Predation through Regulation: The wage and profit effects of the Occupational Safety and Health Administration and the Environmental Protection Agency ‘, Journal of Law and Economics 30 (2), 239-264.
Bassen, A. and A. M. M. Kovacs: 2008, ‘Environmental, Social and Governance Key Performance Indicators from a Capital Market Perspective’, Zeitschrift für Wirtschafts- und Unternehmensethik 9(2), 182–192. SSRN: http://ssrn.com/abstract=1307091.
Bennett, J. A. and R. W. Sias: 2006, ‘Why Company-Specific Risk Changes Over Time’, Financial Analysts Journal 62(5), 89–100.
Börsch-Supan, A. and J. Köke: 2002, ‘An Applied Econometrician’s View of Empirical Corporate Governance Studies ‘, German Economic Review 3 (3), 295-326.
Boulding, W. and A. Kirmani: 1993, ‘A Consumer-Side Experimental Examination of Signaling Theory: Do Consumers Perceive Warranties as Signals of Quality?’. The Journal of Consumer Research 20 (1), 111-123.
Bromiley, P.: 1991, ‘Testing a causal model of corporate risk taking and performance’, Academy of Management Journal 34 (1), 37-59.
Campbell, J. L.: 2007, ‘Why Would Corporations Behave in Socially Responsible Ways? An institutional theory of corporate social responsibility’, Academy of Management Review 32 (3), 946-967.
Chami, R., T. F. Cosimano and C. Fullenkamp: 2002, ‘Managing Ethical Risk: How investing in ethics adds value’, Journal of Banking and Finance 26 (9), 1697-1718.
Chan, L. K., J. Lakonishok and T. Sougiannis: 2001, ‘The Stock Market Valuation of Research and Development Expenditures’, The Journal of Finance 55 (6), 2431-2456.
Chatterji, A. K., D. I. Levine and M. W. Toffel: 2009, ‘How Well Do Social Ratings Actually Measure Corporate Social Responsibility?’. Journal of Economics & Management Strategy 18 (1), 125-169.
Core, J. E., W. R. Guay and D. F. Larcker: 2003, ‘Executive Equity Compensation and Incentives: A Survey’, FRBNY Economic Policy Review 9 (1), 27-50.
Donaldson, T. and L. E. Preston: 1995, ‘The Stakeholder Theory of the Corporation: Concepts, evidence and implications’, Academy of Management Review 20 (1), 65-91.
Fassin, Y.: 2009, ‘The Stakeholder Model Refined’, Journal of Business Ethics 84 (1), 113-135.
Feroz, E. H., K. Park and V. S. Pastena: 1991, ‘The Financial and Market Effects of the SEC’s Accounting and Auditing Enforcement Releases ‘, Journal of Accounting Research 29 (3), 107-142.
Gompers, P., J. Ishii and A. Metrick: 2003, ‘Corporate Governance and Equity Prices’, Quarterly Journal of Economics 118 (1), 107-155.
Gruber, M. J.: 1996, ‘Another Puzzle: The growth in actively managed mutual funds’, The Journal of Finance 51 (3), 783-810.
Gunningham, N., R. A. Kagan and D. Thornton: 2004, ‘Social License and Environmental Protection: Why businesses go beyond compliance’, Law & Social Inquiry 29 (2), 307-341.
Hansen, R. C.: 2006, ‘The Impact of the Equator Principles on Lender Liability: Risks of Responsible Lending’, http://ssrn.com/abstract=948228. Accessed 21 June 2007.
Hart, S. L.: 1995, ‘A Natural-Resource-Based View of the Firm ‘, The Academy of Management Review 20 (4), 986-1014.
Jensen, M. C.: 2001, ‘Value Maximization, Stakeholder Theory and the Corporate Objective Function’, Journal of Applied Corporate Finance 14 (3), 8-21.
Lo, S.-F. and H.-J. Sheu (2007) Is Corporate Sustainability a Value-Increasing Strategy for Business?. Corporate Governance 15 (2): 345-358.
March, J. G. and Z. Shapira: 1987, ‘Managerial Perspectives on Risk and Risk Taking’, Management Science 33 (11), 1404-1418.
Margolis, J. D. and J. Walsh: 2003, ‘Misery Loves Companies: Rethinking social initiatives by business’, Administrative Science Quarterly 48 (2), 268-305.
McWilliams, A. and D. Siegel: 1997, ‘Event Studies in Management Research: Theoretical and empirical issues ‘, Academy of Management Journal 40 (3), 626-657.
McWilliams, A. and D. Siegel (2000) Corporate Social Responsibility and Financial Performance: Correlation or misspecification?’. Strategic Management Journal 21(5), 603-609.
McWilliams, A. and D. Siegel: 2001, ‘Corporate Social Responsibility: A theory of the firm perspective’, Academy of Management Review 26 (1), 117-127.
Olsen, R. A. and G. H. Troughton: 2000, ‘Are Risk Premium Anomalies Caused by Ambiguity?’. Financial Analysts Journal 56 (2), 24-31.
Orlitzky, M.: 2008, ‘Corporate Social Performance and Financial Performance: A Research Synthesis’, in A. Crane, A. McWilliams, D. Matten, J. Moon and D. S. Siegel (eds.), The Oxford Handbook of Corporate Social Responsibility, Chap. 5 (Oxford University Press, Oxford).
Orlitzky, M., F. L. Schmidt and S. L. Rynes: 2003, ‘Corporate Social and Financial Performance: A meta-analysis ‘, Organization Studies 24 (3), 403-441.
Palacios-Huerta, I.: 2003, ‘An Empirical Analysis of the Risk Properties of Human Capital Returns’, American Economic Review 93 (3), 948-964.
Robin, D.: 2009, ‘Toward an Applied Meaning for Ethics in Business ‘, Journal of Business Ethics 89 (1), 139-150.
Rubin, P. H., R. D. Murphy and G. Jarrell: 1988, ‘Risky products, risky stocks’, Regulation 12 (1), 35-39.
Salzmann, O., A. Ionescu-Somers and U. Steger: 2005, ‘The Business Case for Corporate Sustainability: Literature review and research options’, European Management Journal 23 (1), 27-36.
Siegel, D. S. and D. F. Vitaliano: 2007, ‘An Empirical Analysis of the Strategic Use of Corporate Social Responsibility’, Journal of Economics & Management Strategy 16 (2), 773-792.
Social Investment Forum: 2006, 2005 Report on Socially Responsible Investing Trends in the United States, Washington, DC.
Statman, M.: 2000, ‘Socially Responsible Mutual Funds’, Financial Analysts Journal 56 (3), 30-39.
van Marrewijk, M.: 2003, ‘Concepts and Definitions of CSR and Corporate Sustainability: Between agency and communion’, Journal of Business Ethics 44 (2-3), 95-105.
Waddock, S. A. and S. B. Graves: 1997, ‘The Corporate Social Performance-Financial Performance Link’, Strategic Management Journal 18 (4), 303-319.
Zhang, L.: 2005, ‘The Value Premium’, The Journal of Finance 60 (1), 67-103.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Coleman, L. Losses from Failure of Stakeholder Sensitive Processes: Financial Consequences for Large US Companies from Breakdowns in Product, Environmental, and Accounting Standards. J Bus Ethics 98, 247–258 (2011). https://doi.org/10.1007/s10551-010-0544-8
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-010-0544-8