The Wealth Effect of Corporate Water Actions: How Past Corporate Responsibility and Irresponsibility Influence Stock Market Reactions

Abstract

Ensuring access to clean water is one of the most important development and health challenges of the twenty-first century. Given the manifold impacts of business activities on water resources, corporate water actions should be of central concern to business ethics researchers. Yet so far we know too little about whether business activities that impact on water resources are noticed or how corporate water actions are valued by a firm’s stakeholders, including by financial markets. In response, we conduct an event study to investigate the shareholder wealth effect of reports of corporate water actions. We explore stock market reactions to water actions by S&P 500 firms from 2005 to 2017, showing that the market reacts positively to reports of responsible water actions and negatively to irresponsible actions. We further explain that these abnormal returns to water actions are associated with a firm’s past performance on ethical issues, arguing that the reputational effects from prior corporate social responsibility and irresponsibility influence market reactions. Our analysis provides evidence that there are diminishing marginal returns to responsible water actions for firms with records of past responsibility and an offsetting effect for those with past irresponsibility. Similarly, we demonstrate an insurance effect that limits punishment for irresponsible water actions for firms with responsible performance records and diminishing negative marginal returns for those already seen to be irresponsible. This study is the first to show that shareholders recognize market value in corporate water actions and are prepared to award or punish firms in stock markets based on their impacts on water.

Water usage reduction and CSR committees: Taiwan evidence

“…Although this study is a response to calls for more empirical research on corporate water actions and the antecedents of corporate water usage (Afrin et al, 2021;Amran et al, 2014;Kurland & Zell, 2010;Whiteman et al, 2013), it suffers from data limitations.…”

“…Some studies have found a positive relationship between water usage reduction and financial performance (Chang & Liu, 2018), while others have documented no relationship between water usage and financial performance (Oberholzer & Prinsloo, 2011; Wagner, 2005). Recent evidence has addressed the implications for stock markets and revealed that investors react favorably (unfavorably) to responsible (irresponsible) water actions (Afrin et al, 2021).…”

“…In addition to the preceding inconclusive views that require further investigation, we analyze whether the water consumption industries moderate the association between the propensity of water usage reduction and the existence of CSR committees. The water consumption industries confront media attention, intense scrutiny from community groups and water authorities, and increased external monitoring and regulations for water efficiency and conservation (Afrin et al, 2021; Egan, 2015; Vergne, 2012; Zhang et al, 2021). Thus, companies in the water consumption industries tend to make the water security challenge a high priority, and the industrial memberships will affect the demands from CSR committees for companies to save water.…”

“…evidence has addressed the implications for stock markets and revealed that investors react favorably (unfavorably) to responsible (irresponsible) water actions (Afrin et al, 2021).…”

Does Water Matter? The Impact of Water Vulnerability on Corporate Financial Performance

“…Studies have shown that water systems are now increasingly vulnerable and thus companies face serious physical, reputational, and regulatory water risks [ 5 , 6 ]. When companies internalize these risks, they already have significant implications for their business development [ 7 , 8 , 9 ]. However, most companies are still unaware of the risk and opportunities presented by water issues [ 10 ].…”