Shocks, stocks and ratings : the financial community response to global environmental and health controversies

Abstract

The financial community suggests it increasingly accounts for the environmental and social performance of the companies it invests in. To investigate this claim, we study how stock market participants and credit rating agencies respond to environmental and health controversies with internationally operating companies. Stock returns and rating changes are the most prominent financial signals regarding the appreciation of news by the financial community. The actions of numerous investors who trade on public information determine firm value. Credit rating agencies produce ratings based on private information, in part to support these evaluations. Ratings focus directly on a firm’s default and business risk which itself is increasingly associated with global environmental and health controversies. Financial investors show a timely and significant response to measures of such controversies, but this response is highly generic and is small from an economic point of view. Credit ratings do not immediately respond in a significant way. Thus, markets and raters respond in a different way to the controversies. We conclude that the response of the financial community to global environmental and health controversies is limited. Therefore, the financial community seems unable to discipline the economic agents behind the controversies.