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The role of market forces in EPA enforcement activity

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As corporate concern regarding environmental issues grows, recent studies have debated the stock market's role as an enforcer of environmental regulation. We examine stock market reactions to EPA judicial actions on a sample of publicly traded firms from 1972–91. Specifically, we find that (a) there is a significant decline of 0.43% in violator firm value during the week of settlement; (b) the market penalty is unrelated to fine size, (c) more pronounced for citations under the Clean Air Act, (d) for repeat violators, and (e) for more recent EPA actions. These stock market reactions appear to reinforce the intent of EPA enforcement efforts.

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Funding from the United States Environmental Protection Agency (Grant #818496-01-0) is gratefully acknowledged. We would like to thank John Dennis, Tom Adams, V. Denise Saunders, and Robert Papetti for helpful discussions and Bill Lewellen for his insightful comments. The research assistance of Dan Hillis, Nick Wade, and Chris Munger was invaluable. Suggestions by anonymous referees at this journal have greatly improved this paper.

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Badrinath, S.G., Bolster, P.J. The role of market forces in EPA enforcement activity. J Regul Econ 10, 165–181 (1996).

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