The Impact of a Spill or Pollution Accident on Firm Environmental Activity: An Empirical Investigation

Spill and pollution (SP) accidents cause significant damage to the natural environment. They also result in financial costs and reputational losses for the offending firm. As such, understanding how firms respond to such crises is of significant interest to firm stakeholders, such as investors, customers, regulators, NGOs, employees, and local communities. In this study, we examine whether publicly disclosed SP accidents cause firms to alter their approach to environmental management, as expressed by the adoption of environmental management practices (EMPs). Using a unique panel data from 2002 to 2013, representing over 400 publicly traded US manufacturing firms, we find that in the absence of a SP accident, firms adopt more EMPs each year. However, when firms experience a SP accident they respond in surprising ways: while sustainability leading firms do not alter their existing approach to EMP adoption, regardless of the severity of the accident, all other firms do. Firms which are not sustainability leaders escalate the number of EMPs they adopt after low severity accidents and de‐escalate the number of EMPs they adopt after high severity accidents. We also find that de‐escalation can last for up to 3 years and firms do not seem to recover from de‐escalation in future years. Finally, incurring more accidents or more severe accidents leads to greater de‐escalation. Given that the number of EMPs firms adopt determines a firm's environmental performance, de‐escalation can have significant negative consequences for both the natural environment and firms themselves.