Stock market reaction to environmental lawsuits: Empirical evidence from the case against Boliden-Apirsa

The aim of this paper is to assess investors' environmental awareness using reputational losses as a punishment for environmental misconduct. To do so, we examine the 17-year court case against Boliden-Apirsa, implicated in one of the worst environmental catastrophes in the European mining industry. We conduct a short-term standard event study on 55 court rulings, published between 2002 and 2015, to analyze the financial market reaction, differentiating between 34 negative court rulings that blame Boliden-Apirsa for the catastrophe and 21 positive court rulings that exonerate the company from any liability. We also estimate the reputational damage faced by the company considering the fine claimed during the judicial process. Using a financial approach (Reputational Cumulative Abnormal Returns, Rep CAR), we identify and isolate the reputational risk linked to environmental lawsuits. The results reveal an immediate negative market response to announcements of court rulings. In addition, our study indicates that investors are more sensitive to announcements of positive court rulings than to negative ones. However, our study does not provide empirical evidence on the existence of reputational damage, in terms of RepCARs, suggesting that the stock market is selective in reacting to these announcements of environmental court rulings.