The purpose of this paper is to investigate the announcement effect of water pollution on abnormal stock returns of companies and firms’ customers. Adopting event study approach, I examine average abnormal returns (AR) and average cumulative abnormal returns (CAR) of fined companies and their customers around news announcement from 2004 to 2013. Furthermore, I divide fined companies into high-fine companies and low-fine companies and compare firms and their customers’ AR and CAR between these two groups.
Empirical results show three main findings. First, the announcement of water pollution fine news has a negative effect on firm stock prices. However, the effect does not immediately reflect on the news announcement date but delays for several days (8 to 10 days). It means that the announcement of water pollution fine news is informative in stock markets, but the market seems not efficiently response to the information. Second, the announcement of water pollution fine news has a negative impact on stock prices of firms’ customers, and the effect also reflects significantly only on several days (8 to 10 days) after news announcement date. It infers that the announcement of water pollution fine news has a contagion effect to firms’ customers. Lastly, different levels of fines have a negative but not significant effect on firm stock prices, but it has a negative effect significantly on firm’ customers stock prices. It implies that the stockholders of firm’ customers will take the fine events into consideration. Specifically speaking, they may worry that the negative news will influence operation of customer firms for uncertain supply in the future. Therefore, customers of high-fine firms suffer more serious and significant contagion effects in stock markets from the water pollution fines announcements.
