The Impact of the Disclosure of the Environmental Effects of Organizational Behavior on the Market

Abstract

This article presents a study on the impact of the disclosure of the environmental effects of organizational behavior on the stock market. It is evidently quite difficult to isolate the specific effects of pollution control expenditures on the price behavior of the stock market because of the presence of a myriad of other influencing factors. This investigation of 50 companies which disclosed their pollution control expenditures showed a significant change centered on the date of disclosure, and the resulting expectations had apparently a substantial and temporary effect on the stock market performance. This result follows the efficient market hypothesis in its semi-strong form. Under the naive investor hypothesis it verifies the existence of an "ethical investor," In general, this study refutes the suggestion that the worst offenders in the reporting of social costs will be rewarded more in the capital market. In fact, on the basis of these results, managers may be advised to allocate a proportion of their resources to pollution control and to report these expenditures to the stockholders. One might even assume that in the long run, the firm which installs pollution control devices now may have better income and less risk of plant closings by the Environmental Protection Agency in the next decade than a competing firm which postpones such expenditures until it is forced to make them later