Unexpected Media Coverage and Stock Market Outcomes: Evidence from Chemical Disaster

Mardi | 2009-04-14

Marie-Aude LAGUNA – Audrey LAUDE

Using the event-study methodology and multivariate regressions, this paper examinesthe intensity of media coverage, its determinants and its marginal effect on stock returnsfollowing chemical disasters. To do this, we build an original dataset of chemical explosionsthat occurred worldwide from 1990-2005. First, our results show that news coverage increaseswith the social and environmental consequences of the accident. Second, to deal with the factthat news coverage is determined simultaneously with stock returns, we suggest two validand original instrumental variables: a measure of the firm’s newsworthiness and a measure ofdaily news pressure at the time of the disaster. We find that unexpected news coverage dueto chemical disasters also respond to these conjunctural factors, and is truly exogenous toabnormal returns. Third, we show that, all else being equal (pollution, number of casualties,and firm profile), the stock market reaction to intense press coverage is delayed, and becomesnegative in the long-term. At the same time, there is clear evidence that in the first daysnews coverage mitigates the market value losses. We interpret these results as evidence thatinvestors are slow to recognize the extent of the loss associated with the public implicationsof news coverage (e.g., image and public trust deterioration). In addition, in contrast toprevious studies, we argue that press coverage is not necessarily associated with increasedinvestor attention.