The economic costs of sexual harassment: a new study of almost 200 sexual harassment scandals at publicly traded companies finds that they result in an initial loss of 1.5% of that company’s market value (on average), equivalent to $450 million. In the long term, the affected firms recovered only about half of that lost value.
Those are the results of a new study that appeared on January 6 in the Journal of Corporate Finance.
The study also found greater losses when the scandal involved the firm’s CEO. Excessive media attention also increased the loss in value. The losses were smaller when the firm disclosed the scandal itself.
Lots of prior research has found significant losses in company value as a result of corporate malfeasance. But the specific impact of sexual harassment scandals on company value had not yet been studied. That was reason enough for the authors of the current paper to investigate.
A unique database of #MeToo scandals
For their study, the team of researchers from Denmark looked at almost 200 sexual harassment incidents that took place at publicly traded companies.
To assemble their data set, they combed through English-language news archives from January 2005 to February 2019. They downloaded all articles that documented corporate scandals involving the term “sexual harassment” or its synonyms. These included for example “sexual misconduct” or “indecent assault.”
This resulted in a data set of almost 15,000 articles. Many of these articles involved privately held firms, or articles where the term “sexual harassment” occurred in an irrelevant context. These articles were discarded. The researchers also discarded articles about companies that were facing bankruptcy around the time of the scandal (but for reasons unrelated to the scandal), and other confounding factors such as activist investors attempting to gain control of a company’s board.
From consumer favorites to financial powerhouses
The researchers ultimately wound up with a list of 199 sexual harassment scandals. These included many household names, such as Disney, Tesla, Amazon, Google, and Facebook. The list also included financial firms like Goldman Sachs and Morgan Stanley, and popular media brands including The New York Times, Fox, and CBS.
About 78% of the scandals took place in the US, and another 18% in other English-speaking countries. The accuser was a female in 88% of the cases; 73% of cases had only one accuser. The data set included roughly equal numbers of physical and non-physical harassment cases. The accused personnel were CEOs (14%), other executives (26%), or non-executives (60%).
The economic costs of sexual harassment in numbers
The researchers found “a negative 1.5% cumulative abnormal return over the event day and the following trading day.” For the roughly 200 companies in their sample, that corresponded to an average impact of $450 million.
In the long term, the companies hit by such a scandal recovered only about half of that lost market value. The long-term average was a 0.8% loss, worth on average about $250 million.
Emergence of the #MeToo movement
The study also found the impact of sexual harassment scandals on company value was about the same both before and after the emergence of the #MeToo movement. The paper dates that mergence as October 5, 2017. That is the day that The New York Times published its first article about the systematic sexual misconduct of Harvey Weinstein.
In contrast, the number of sexual harassment scandals at public companies has quadrupled since the emergence of the #MeToo movement. About 45% of the cases in this data set took place after October 2017.
Furthermore, the study also found that the market impact was lower in countries with lower levels of gender equality.
What raises or lowers the economic costs of sexual harassment?
The involvement of a CEO in the scandal was a consistent driver of negative returns, adding an additional 5% drop in company value. Similarly, more media attention also corresponded to greater losses.
On the other hand, instances where companies self-disclosed the misconduct before it was discovered by the media were punished considerably less by the market. The market reaction was also less severe in cases where the accused CEO left the firm, versus staying on.
The study found that these losses stem mostly from damage to the firm’s reputation and public sentiment, rather than the costs of penalties and compensation claims, or the costs associated with the loss of expensive personnel.
In terms of damage control, the authors found that “immediate attempts at reputational repair are associated with alleviated market responses.” In other words, “the reputational effect and impact on public sentiment is an important channel of impact on market value” for companies embroiled in such a scandal.
In sum, the authors conclude, “there is a highly significant negative market reaction to sexual harassment scandals that can wipe off enormous amounts of market value in a matter of days.”
And these findings should put to rest “any remaining contemplation among managers and investors about whether sexual harassment is a real business risk,” they write. “The impact is shown to be both real and economically significant.”
Study: “#MeToo: Sexual harassment and company value”
Authors: Mads Borelli-Kjaer, Laurids Moehl Schack, and Ulf Nielsson
Published in: Journal of Corporate Finance
Publication date: January 6, 2021
Photo: by Mohamed Hassan via Pixabay