Reputational Penalties for Corporate Human Rights Violations: An Event Study Based on Business and Human Rights Resource Center Data

Increased transparency about implications of corporate activities on human rights is often assumed to contribute to prevention of corporate human rights violations, as negative publicity following violations may generate reputational damage for corporations. However, whether and when such reputational damage actually occurs, and in what shape, is unknown. This paper uses an event study design to investigate stock market reactions to disclosure of corporate human rights transgressions as one aspect of reputational damage.
Extant scholarship identifies the direct damage inflicted by the violation on investors as a main explanatory factor for financial reputational damage – thus, accounting fraud generates stronger stock market reactions than corporate environmental offenses. As human rights violations do not directly damage investor interests, an initial assumption could be that these violations remain unpunished by the market. Yet there are various reasons to assume that stock market reactions to corporate human rights violations are stronger than current theories would predict. First, stakeholders have been more prominent in holding corporations accountable, and public concern and moral indignation over CSR transgressions has risen over the past 10 years. Second, increased exposure on social media has made the damage of corporate human rights violations more visible. Third, activist shareholders and institutional investors exercise more scrutiny on the societal implications of corporate activities. Fourth, following the realization of non-binding international frameworks relating to business and human rights, politicians and NGOs are pushing for more binding regulations.

As stakeholders express stronger reactions to corporate human rights violations, we might expect shareholders to anticipate more negative effects by devaluating the stock rate. Our research question is therefore whether the stock market reflects the changed societal expectations with regard to corporate social responsibility for human rights.

To investigate these questions, we conducted an event study based on the disclosure of allegations of corporate human rights violations by the Business and Human Rights Resource Center, an NGO dedicated to increasing transparency and accountability regarding business activity and human rights. Based on more than 200 events, we examine the effects of information about corporate human rights violations by transnationally operating business enterprises on their market value. From this, we infer to what extent stakeholders value corporate human rights violations and ‘punish’ the company for its misconduct. We examine, inter alia, whether market reactions are limited to expectations of costs related to human rights violations (such as mediation or reparations) or whether they also occur through a reputational mechanism (such as an expected reaction of customer boycotts or shareholder activism).