The Market Response to Environmental Incidents in Canada: A Theoretical and Empirical Analysis

TLDR

Regulatory safety measures in products, workplaces, and the environment are often criticized for weak enforcement and low fines, which may fail to deter non‑compliance, though market forces can also incentivize firms. Public announcements of lawsuits against firms for safety and environmental violations can sharply reduce equity value, while settlement announcements have little effect. Saxe notes that fines under Ontario's Environmental Protection Act are too low to deter non‑compliance.

Abstract

There is a growing concern that regulations that promote safety (e.g., automobile safety and product safety) may have little impact on level of risk associated with utilization of such products [21; 29]. A similar concern has been recently raised with respect to regulations that promote safety in workplace [12]. A reason often advocated to explain this phenomenon is lack of adequate enforcement mechanisms. In particular, it is often argued that fines imposed on agents not complying with these regulations are not severe enough to have a deterrence effect [30]. With respect to enforcement of Ontario Environmental Protection Act (R.S.O. 1980, c. 141), Saxe writes that the majority of fines were too low to act as effective deterrents [23, 104]. However, some authors have challenged this view in showing that market provides additional monetary incentives for firms to comply with regulations by punishing non-complying firms through lower stock market prices. For example, some analyses have shown that public announcements of lawsuits against American firms not complying with workplace safety [8], product safety [31] and environmental regulations [19] have caused significant drops of equity value of these firms. In this last study, it was found that announcement of lawsuits against firms violating American Resource Conservation and Recovery Act (RCRA 1976) had a significant negative impact on their equity value on day of announcement, while announcements of suit settlements (e.g., fines) had no effect. In most studies, authors argue that reductions in stock prices have some deterrence effect on firms.