metadata: authors: 0: author: Dasgupta,Susmita
1: author: Hong,Jong Ho
2: author: Laplante,Benoit
3: author: Mamingi,Nlandu
count: Korea, Republic of
docna: 0: docna: Disclosure of environmental violations and
            the stock market in the Republic of Korea
docty: Policy Research Working Paper
subtopic: Environmental Strategy,Social Policy,Legal Products,Environmental & Natural Resources Law,Judicial System Reform,Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Environmental Management,Capital Markets and Capital Flows,Capital Flows,Hydrology,Legal Reform,Legislation,Regulatory Regimes,Business Cycles and Stabilization Policies,Global Environment
teratopic: Water Resources
abstracts: cdata!: For almost 20 years, the Ministry of
            Environment of the Republic of Korea has published on a
            monthly basis a list of enterprises that fail to comply with
            national environmental laws and regulations. In this paper,
            the authors examine the reaction of investors to the
            publication of these lists and show that enterprises
            appearing on these lists have experienced a significant
            decline in their market valuation. Firms in developing
            countries are often said to have no incentives to invest in
            pollution control because they typically face weak
            monitoring and enforcement of environmental regulations. The
            findings of the authors, however, indicate that the
            inability of formal institutions to control pollution
            through fines and penalties may not be as serious an
            impediment to pollution control as is generally argued.
            Environmental regulators in developing countries could
            harness market forces by introducing structured programs to
            release firm-specific information about environmental performance.
geo_reg_key: 517198,119225,517191
repnme: repnme: Disclosure of environmental violations and
            the stock market in the Republic of Korea
display_title: Disclosure of environmental
            violations and the stock market in the Republic of Korea
listing_relative_url: /research/2004/06/4966653/disclosure-environmental-violations-stock-market-republic-korea
topicv3: Manufacturing Sectors m1326521 1281,Water m1326522 137,Environmental Laws and Regulations
            m1326889 849,Capital Markets m1326967 332,Environment, Natural Resources and Blue
            Economy m1327391 566
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Water Resources
no_of_pages: 39
author_keys: 0: author_key: 95558
1: author_key: 638614
2: author_key: 97490
3: author_key: 438393
model_extractions: WPS3344

# Disclosure of Environmental Violations and the Stock Market in the Republic of Korea

## SUSMITA DASGUPTA

_Development Research Group, Infrastructure and Environment, The World Bank, Washington, DC, USA_

## JONG HO HONG

_College of Economics and Finance, Hanyang University, Seoul, Korea_

## BENOIT LAPLANTE

_Independent Consultant, Montreal, Canada_

## NLANDU MAMINGI

_The University of the West Indies, Bridgetown, Barbados_

**Summary** . For almost 20 years, the Ministry of Environment of the Republic of Korea has published on a monthly basis a list of enterprises which fail to comply with national environmental laws and regulations. In this paper, we examine the reaction of investors to the publication of these lists, and show that enterprises appearing on these lists have experienced a significant decline in their market valuation.

_Key words_ – Environmental violations, public disclosure, stock market, Korea.

World Bank Policy Research Working Paper 3344, June 2004 _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._ Correspondence should be addressed to: Susmita Dasgupta, MC2-205, World Bank, 1818 H Street, NW, Washington, DC 20433, <u>sdasgupta@worldbank.org.</u> 1
# **Acknowledgments**

We express our sincere thanks to Mr. Jongsoo Yoon, General Director of Public Affairs at the Ministry of Environment of Korea, for his support with the data collection process. We would also like to thank Il Hwan Ahn, Dae Hee Kim, and Jeong Kyu Yoon at the graduate school of Hanyang University for their research assistance. Finally, we extend our most sincere thanks to Ms. Annette Green for her assistance.

2
# **I. Introduction**

It is often said that firms in developing countries do not have incentives to invest in pollution control effort because of weak implementation of environmental regulations: the cost of complying with the regulation exceed expected benefits resulting from a reduction in expected penalty. However, this argument assumes that the environmental regulator is the only agent that can effectively penalize firms lacking compliance. Recent research indicates that local communities may exercise considerable leverage to pressure firms to improve their environmental performance.<sup>1</sup> The argument also ignores that capital markets may react _negatively_ to the announcement of adverse environmental incidents (such as violation of permits, spills, court actions, complaints, etc.) or _positively_ to the announcement of superior environmental performance. Hence, when accounting solely for regulators’ fines and penalties and ignoring the pressure that communities and markets may bear, the expected costs associated with a poor environmental performance may be significantly under-estimated. The inability of formal institutions especially in developing countries to provide incentives for pollution control effort via the traditional channel of fines and penalties may not be as serious an impediment to pollution control as is generally argued: Communities and capital markets, if properly informed, may in A limited number of papers have analyzed the reaction of capital markets to environmental news in Canada and the United States. These studies have generally shown that firms suffer from a decline in market values following the announcement of

> 1  See Afsah et al. (1996), Blackman et al. (1998), and Pargal and Wheeler (1996).

3
adverse environmental news.<sup>2</sup> The impact of firm-specific environmental news on market value may work its way through various channels: a high level of pollution intensity may signal to investors the inefficiency of the firm’s production process; it may invite stricter scrutiny by environmental groups and/or facility neighbours; it may result in the loss of reputation, goodwill, etc. On the other hand, the announcement of a good environmental performance or of the investment in cleaner technologies may have the opposite effect: lesser scrutiny by regulators and communities (including the financial community), and greater access to international markets among other benefits.<sup>3</sup> Studies of this nature in developing countries have been very limited in numbers. In a recent paper, Dasgupta et al. (2001) have shown that capital markets in Argentina, Chile, Mexico, and the Philippines do react negatively (decrease in firms’ value) to citizens’ complaints targeted at specific firms, and positively to the announcement of rewards and recognition of superior environmental performance. These results suggest that environmental regulators in developing countries may explicitly harness those market forces by introducing structured programs of information release on firms’ environmental performance, and empower communities and stakeholders through environmental education programs.

Numerous countries, both developing and developed have in fact implemented such programs. An increasing number of environmental regulators around the world have

> 2 In the United States, these studies include analyses of the reaction of capital markets to releases of the _Toxics Release Inventory_ (Hamilton (1995), and Konar and Cohen (1997)). Lanoie and Laplante (1994) analyze the reaction of capital markets to environmental news in Canada. For a survey of these studies, see Lanoie, Laplante and Roy (1998).

> 3 See Porter and Van Linde (1995), and Konar and Cohen (1997) for a more detailed discussion.

4
indeed sought to complement or supplement traditional enforcement actions (fines and penalties) with the adoption of structured information programs (or public disclosure programs) by which the environmental performance of industrial facilities is revealed. Programs such as the Toxics Release Inventory (TRI) in the United States (also implemented in Canada and Great Britain), or the Proper Prokasih program in Indonesia and the EcoWatch program in the Philippines are examples of structured information programs that rely on non-regulatory forces to create incentives for (mainly industrial) facilities to improve environmental performance.<sup>4</sup> While this may not be as well-known, the Republic of Korea (henceforth Korea) has developed its own extensive experience with the public disclosure of environmental performance of regulated facilities. Since the mid 1980s, the Ministry of Environment of Korea has published on a monthly basis a list of facilities in violation with existing Korean environmental laws and regulations. Over the sole period of 1993 to 2002, over 7,000 _violations_ have been reported on those lists, involving more than 3,400 facilities. As such, the Korean experience with a structured public disclosure program may very well be one of the most extensive experiences of this nature in the world.<sup>5</sup> In this paper, building upon the existing, albeit limited literature on this topic, we examine whether or not capital markets in Korea have reacted to the information contained in these monthly violation lists.

> 4 See Foulon et al. (2002), Lanoie et al. (1998), and World Bank (2000) for a description of such programs. 5 While it covers a larger number of years and facilities, the US TRI does not, by its very nature, focus necessarily on facilities in _violation_ of existing laws and regulations.

5
In the next section, we provide a brief description of the Korean public disclosure program. In Section 3, the event-study methodology is briefly described. We present the dataset and our results in Section 4, and conclude in Section 5.

# **2. Description of the Korean public disclosure program**<sup>**6**</sup>

In the course of the rapid economic expansion of the 70’s and 80’s, the Government of Korea expressed a reluctance to strictly enforce its environmental regulations worrying to damage the economic performance and competitiveness of industrial facilities. On the other hand, there was mounting pressure on the Government to improve environmental protection in the country. It is in this context that the Monthly Violations Report (henceforth MVR) was first published in March 1984 by the Environment Administration as news material distributed to media reporters. The government’s rationale behind the disclosure of the MVR was to provide incentives for industrial facilities not to practice illegal polluting activities while not resorting to legal fines and penalties. The MVR then consisted of a list of facilities in violation with existing Korean environmental laws and regulations. The violations included, among others, emission standard violation and failure to operate pollution control equipment. Given the limited monitoring capacity in terms both of financial and human resources, the MVR then had a very limited coverage.

In 1990, the Environment Administration became the Ministry of the Environment and was upgraded to the cabinet level, thereby being able to take greater charge of environmental policies and affairs within the government. The MVR disclosure

> 6  For a detailed description, see Hong et al. (2003).

6
program has continued throughout the 1990s. Under the Ministry, the program has enlarged considerably in terms of human and financial resources. A typical MVR in this period is based on information gathered through monthly government inspections on about 10,000 air and water polluting facilities, using a total of approximately 15,000 man-days from local governments and Regional Environmental Offices. Since November 1990, the Reports are also publicly disclosed through the Ministry of Environment official website, thus widening considerably its public outreach.<sup>7</sup> While similar in spirit to the U.S. EPA’s Toxics Release Inventory (TRI), the Korean MVR differs significantly from the TRI in that it reports the names of companies that are effectively deemed to be _in violation_ of Korean environmental laws, as well as the nature of enforcement actions undertaken by the Ministry. The TRI is limited to reporting quantities of toxic wastes produced by a set of facilities, without attempting to assess the compliance status of these facilities. To this extent, the Korean MVR is conceptually similar to the lists by the Ministry of Environment, Lands and Parks of British Columbia (Canada) which aims to publicly disclose firms that either do not comply with the existing regulation or whose environmental performance is of concern to the Ministry.<sup>8</sup> Over the period 1993-2002,<sup>9</sup> a total of 7,073 violation events appeared on a total of 113 violation lists published on a monthly basis. Over this period of observation, a

> 7 See: www.me.go.kr

> 8 See Foulon et al. (2002) for more details.

> 9  The Koran regulation pertaining to the length of time that information must be stored is such that all records previous to 1993 are unfortunately no longer available. While in this paper we shall refer to the

7
total of 3,455 different facilities have appeared on the monthly violation lists, some more than once. The number of events and facilities indicates that on average each facility appeared 2.5 times on the violation lists. Most of these facilities (85%) belong to the manufacturing sector. Of greater interest for the purpose of the current paper is that 17% of the facilities appearing on these lists are listed on the Korea Stock Exchange (KSE) whose headquarters are located in Seoul. While the percentage of events involving traded companies may appear relatively small (approximately 17%), it is worth noting that in 2001, 690 companies were listed on the Korea Stock Exchange, out of a total of 106 550 manufacturing firms with 5 employees or more, thus representing less than 1% of the total number of manufacturing facilities. This would suggest that traded companies are in fact overly represented in the monthly violation lists relative to their overall number in the population of enterprises in Korea.

Approximately 60% of the violations reported in the MVR pertain to the violation of Korean emissions standards. The second largest type of violation (18.0%) is the failure of pollution abatement equipment to operate effectively. Insofar as government actions are concerned, the largest number (61%) is government orders, followed with warning and prosecutions. Orders include orders to change equipment, and to appoint environmental management personnel. While a large number of facilities have been subjected to only 1 government action, an even larger number of facilities have received more than one government action. For example, 145 facilities have been subjected from 5 to 10 government actions; 13 facilities have received more than 20 government actions; period 1993-2002, it should be understood that it also includes December 1992, while data for 2002 covers solely the period January to April 2002.

8
the Busung Paper company has received the largest number of government actions with a total of 84.

Since 1990, the Korea Press Foundation has operated a comprehensive online news database service known as KINDS (Korean Integrated News Database System). This system is the largest service of this nature in Korea. It covers national and economic daily newspapers in both Korean and English, news bulletins, local daily newspapers, magazines, and foreign newspapers. It provides the complete text of 10 major national daily newspapers.<sup>10</sup> On-line users can further search articles in 23 local daily newspapers in Korea. Since its inception, it has cumulated a total of over 3 million articles, and continues to add to its database approximately 2,000 articles each and every day. The KINDS database was searched by entering keywords such as environment, violation, and accident, searching for articles related to environmental news.

Over the period of observation, approximately 11% of the total number of violation events that have appeared on the MVR have been covered by printed news media. In Table 1, note that of the 756 events covered in the printed news media, 40% of them involved traded companies. Given that traded companies represent only 17% of the total number of violation events, it would appear that news media show a particular attention to traded companies (which may also be larger and more prominent companies) in their news coverage of the MVR.

> 10 The Kyunghyang Shinmun, the Kukmin Daily, the Korea Daily News, the Dong-A Ilbo, The Numhwa Ilbo, the Segye Ilbo, the Chosun Ilbo, the Joongang Ilbo, the Hankyoreh, and the Hankook Ilbo.

9
**Table 1**

**Media coverage: Traded vs. non-traded**

|**In news**|**Total**|**Traded**|**% traded**|**Non-traded**|**% non-**<br>**traded**|
|---|---|---|---|---|---|
|No|6317|887|14 %|5430|86 %|
|Yes|756|303|40 %|453|60 %|

This greater interest in traded companies is also revealed by examining the number of newspapers in Korea that have given coverage to a specific violation event. In Table 2, note that 39.3% of the events involving traded companies have been covered by more than 1 newspaper, while only 24.1% of the events involving non-traded companies have been covered in more than one newspaper.

# **Table 2 Frequency of news coverage: Traded vs. non-traded**

|**Number of newspapers that have**<br>**covered the event**|**Total**|**Traded**|**%**<br>**traded**|**Non-**<br>**traded**|**% non-**<br>**traded**|
|---|---|---|---|---|---|
|1|531|187|61.7|344|75.9|
|2|137|64|21.1|73|16.1|
|3|52|28|9.2|24|5.3|
|4|21|15|5.0|6|1.3|
|5|8|6|2.0|2|0.4|
|6|4|2|0.7|2|0.4|
|7|1||0.0|1|0.2|
|8|2|1|0.3|1|0.2|
|**Total **|**756**|**303**|**100.0**|**453**|**100.0**|

Newspapers appear to be particularly interested by violations pertaining to the failure of pollution abatement equipment (Table 3). While this type of violation represents only 18.0% of the total number of events, it represents more than 25% of the events covered by newspapers. On the other hand, while the failure to report and failure of the monitoring system represent 9.2% of the total number of violations, these two types of violation represent only 5.5% of the events covered by the newspapers.

10
# **Table 3 News coverage per type of violation**

|**Nature of violation**|**% of events covered**<br>**in news**|**% of total**<br>**events**|
|---|---|---|
|Violation of emissions standards|53.9|60.8|
|Failure of pollution abatement equipment|25.1|18.0|
|Failure to report|3.4|5.3|
|Failure of monitoring system|2.1|3.9|
|Failure of environmental manager|1.9|3.6|
|Violation of technical standards on inputs|0.5|0.9|
|Illegal waste discharges|1.2|0.8|
|Violation of government order|0.6|0.7|
|Otherviolation|11.2|6.1|
|**Total **|**100.0**|**100.0**|

In terms of government actions, orders and warnings appears to receive less interest from the newspapers than their weight as a percentage of the total number of violation events (Table 4). However, while prosecutions represent only 9.9% of the total violation events, they represent almost 16% of the violation events reported in the newspapers. Similarly, shutdowns (temporary or complete) and bans receive more attention in newspapers (7.5% of all events in the newspapers) than their overall importance in the monthly violation lists (11.8% of all violation events).

11
**Table 4**

# **News coverage per type of government actions**

|**Government actions**|**% of events covered**<br>**in news**|**% of total**<br>**events**|
|---|---|---|
|Order|53.9|61.3|
|Warning|8.1|11.4|
|Prosecution|15.8|9.9|
|Penalty|4.2|7.1|
|Temporary shutdown|5.8|4.3|
|Shutdown|6.0|3.2|
|Ban to use specific equipment|6.0|2.8|
|Other|0.1|0.1|
|**Total**|100.0|**100.0**|

The above information indicates that newspapers have indeed paid attention to the information released by the Ministry of the Environment in its MVR, and that the media coverage has focused very significantly on publicly traded companies. This therefore sets the stage for an analysis of how the Korean Stock Market reacted to the media coverage of the MVR.

# **3. Event-study methodology**

The event-study methodology is used here to see the extent to which investors react to environmental news (also called events).<sup>11</sup> The key assumption of the methodology is that capital markets are sufficiently efficient to evaluate the impact of new information (events) on expected future profits of the firms.

The methodology involves the following steps: (1) identification of the events of interest and definition of the event window;<sup>12</sup> (2) selection of the sample set of firms to

> 11  For more details, see MacKinlay (1997).

> 12 The event window consists of the day where the event occurred (day 0) and some days before and after the event.

12
include in the analysis;<sup>13</sup> (3) prediction of a “normal” return during the event window in the absence of the event; (4) estimation of the abnormal return within the event window, where the abnormal return is defined as the difference between the actual and predicted returns; and (5) testing whether the abnormal return is statistically different from zero. The market model is of interest here to estimate abnormal returns.

The market model assumes a linear relationship between the return of any security to the return of the market portfolio: where _t_ is the time index, _i_ = 1 2,,..., _N_ stands for security, _Rit and Rmt_<sup>are the returns</sup> on security _i_ and the market portfolio respectively during period _t_ , and _eit_ is the error term for security _i_ .

Equation (1) is generally estimated over a period which runs between 120 and 210 days prior to the event up to some days prior to the event. The event window is defined as the period from some days prior to the event to some days after the event. The size of the event window is really an empirical matter. With the estimates of α _i and_ β _i_ from equation (1), one can predict a “normal” return during the days covered by the event window. The prediction error (the difference between the actual return and the predicted

> 13 Firms may be excluded if simultaneous events are occurring within the event window.

13
normal return), commonly referred to as the abnormal return (AR) for a single security i at a given time _t_ , is then calculated as: Under the null hypothesis, the abnormal returns will be jointly normally determined with a zero conditional mean and conditional varianceσ<sup>2</sup> ( _ARit_ ) : where _L_ is the estimation period length (i.e. number of days used for estimation) and For each individual event, one can estimate the abnormal return and relevant test statistics at each instant in time within the event window. However, in order to draw overall inference about the reaction of capital markets, one can also aggregate the abnormal returns across a number of events (usually across events of a similar nature). Hence, for any given subset of N events (or securities), the subset average abnormal returns ( _AARt_ ) at each instant _t_ within the event window is computed as 14
For large _L_ , the variance is To test for the significance of _AARt_ a _Z_ (or _t_ ) test can be derived.

In order to test for the persistence of the impact of the event during a period ( _T_ 2 − _T_ 1 ) , the abnormal return for a given security i can also be added to obtain the cumulated abnormal returns ( _CARi_ ( _T_ 1 , _T_ 2 )) for security _i_ over the period ( _T_ 2 − _T_ 1 ) : where _Ta_ ≤ _T_ 1 < _t_ < _T_ 2 ≤ _Tb_ ∈ event window, and _Ta_ and _Tb_ are the lower and upper limits of the event window, respectively.<sup>14</sup> Asymptotically (as _L_ increases) the variance of the cumulative abnormal return for security i is To test the null hypothesis of zero cumulative abnormal return, one can formulate a Z test as _CARi_ ( _Ti_ , _T_ 2 ) ~ _N_ (0, σ _i_ 2 ( _Ti_ , _T_ 2 ) **:** _CAR_ (8) _Z_ = (σ<sup>2</sup> _i_ ( _T_ 1, _T_ 2 ))1/2 ~ _N_ (0,1)

> 14 _T1_ and _T2_ are thus contained within the event window and the aggregation of the abnormal return takes place between those days within the window. As a possibility, _T1_ can coincide with the lower bound of the event window and _T2_ with the upper bound.

15
An aggregation of interest can also be performed across both time and events. In that scenario, the average cumulative abnormal return for a subset of N events between two dates _T_ 1 and _T2_ is defined as: where N is the number of events. The variance of _CAAR_ is Under the null hypotheses that the abnormal returns are zero, As pointed out by MacKinlay (1997), this distributional result is asymptotic with respect to the number of securities _N_ and the length of estimation window _L_ . Moreover, the validity of cross-sectional (or pooled) aggregation of abnormal returns rests on the assumption that the event windows do not overlap. If they do then the distributional results presented above are no longer valid since covariances across securities are no longer zero, particularly in the case of complete clustering. There are two solutions to the problem of clustering. The first one is to aggregate abnormal returns into portfolios. The 16
second one is basically to leave abnormal returns unaggregated; that is, one has to deal with abnormal returns security by security (for details, see MacKinlay, 1997, 27).

In the next section, we present results obtained from using the single-index model (constant mean return model).<sup>15</sup>

# **4. Dataset and Results**

The initial dataset comprises 96 environmental news (details appear in Appendix 1). These events were examined to identify whether or not other events (positive or negative) were observed during the identified window. These confounding events could impact the results from the event-study methodology. As a result, 9 events were eliminated from the dataset.<sup>16</sup> Thus, the dataset used for the analysis of stock market reaction comprises 87 environmental news involving 57 publicly traded firms over the period 1993 to 2000. All events are of a negative nature. Of the 87 events, 57 (65.5%) pertains to the violation of emissions standards, while 17 (19.5%) pertain to the failure to operate pollution abatement equipment.

We apply the event-study methodology to each of these 87 events. The study uses an estimation period of 210 days before the event window and an event window of 7 days (3 days prior the event, the day of the announcement, and 3 days after the event).

> 15  The single-index model is a particular case of the market model described above. Where market returns were available, we also obtained results using the market model. Results were similar to those presented here. In fact, Henderson (1990) points out that the three estimating methodologies yield results of similar nature.

> 16 These are (by code number): 210 (3/4/99), 2270 (12/1/99 and 11/3/99), 2580 (8/31/96), 4800 (8/27/99), 5300 (7/1/94), 9830 (12/30/96), 11780 (1/30/97), and 15760 (8/1/96).

17
The latter size of the event window has been determined empirically through a search over a period of 10 days before and 10 days after the event.

Appendix 2 presents the list of 87 events and differentiates those events for which a statistically significant stock market reaction has been estimated from those for which no such reaction has been estimated. Detailed statistical results for those events with market reaction are presented in Appendix 3.

As shown in Appendix 2, 52 of the 87 events (60%) included in our dataset show a statistically significant market reaction. However, 5 of these exhibit a positive market reaction.<sup>17</sup> We were not able to identify whether or not these 5 events were plagued by the presence of simultaneous, positive, events. We cannot therefore offer a credible explanation for the unexpected market reaction for these 5 events. Of those events with negative market reactions, the average percentage reduction in market value has been calculated to be 9.7%. As shown in Table 5 below, this average reduction in market value is much higher than results obtained in Canada and the United States, but of a similar order of magnitude as results obtained in Argentina, Chile, Mexico, and the Philippines (Dasgupta et al. (2001)). This would tend to re-enforce the hypothesis that capital markets in developing countries may attach a greater premium to information which otherwise may generally not be as readily available as in more developed markets.

> 17 These events are (by code number): 1440 (9/27/93), 1460 (4/27/93), 2270 (1/20/2000), 9840 (3/1/94), and 25830 (8/31/96).

18
**Table 5 Comparative results**

|**Selected studies**|**Events**|**Media**|**Observed**<br>**Reaction**<sup>**a**</sup>|
|---|---|---|---|
|Muoghalu et al. (1990)|Filing of lawsuit for<br>violationof RCRA<sup>b</sup>|Newspaper (USA)|-1.2%|
|Lanoie and Laplante<br>(1994)|Court finds firm guilty<br>for violating environ.<br>Regulation|Newspaper<br>(Canada)|-1.65%|
|Klassen and McLaughlin<br>(1996)|Environmental crisis|Newspaper (USA)|-1.5%|
|Hamilton (1995)|List of polluters|Toxics Release<br>Inventory (USA)|-0.3%|
|Konar and Cohen (1997)|List of polluters|Toxics Release<br>Inventory (USA)|-1.3%|
|Lanoie, Laplante, and Roy<br>(1998)|List of polluters|British Columbia<br>(Canada)|-2%|
|Dasgupta et al. (2001)|Citizens complaints and<br>environmental accidents|Newspaper<br>(Argentina, Chile,<br>Mexico and<br>Philippines)|-4% to -15%|

a Average estimated change in market return. b Resource Conservation and Recovery Act.

If we include all events with market reaction, we note in Table 6 that 69% (36/52) of the events with market reaction are violation of emission standard, which is a slightly higher percentage than the percentage of those events in our dataset (65%). On the other hand, the failure to operate PCE properly represents only 15% of those events exhibiting market reaction, which is a slightly lower percentage than the share of those events in the dataset. This would appear to indicate, perhaps as may have been expected, that the market react slightly more frequently to the violation of emission standard than to the failure to operate PCE properly. However, the average percentage reduction of market value for those events pertaining to the violation of emission standard is 8.96%, while the average reduction is calculated to be 15.3% for those events pertaining to the failure of operating PCE properly. It should be noted however that we accept the null hypothesis at 19
the 10% level of significance that there is no significant difference between negative market reaction from events of violation of emission standard and that of events of failure to operate PCE properly.<sup>18</sup>

# **Table 6 Market reaction per type of events**

||**Violation of**<br>**emission standard**|**Failure to operate**<br>**PCE properly**|**Other**|
|---|---|---|---|
|**With market**<br>**reaction**|36|8|8|
|**Without market**<br>**reaction**|21|9|5|
|**Total**|57|17|13|

All other things being equaled, it may further be assumed that markets have increasingly reacted to environmental news over the period of analysis as environmental awareness may have increased throughout society. This however does not appear to be case as shown in Table 7. Moreover, we have grouped the events into 3 different subgroups: (1) a sub-group covering the period 1992-1994; (2) a sub-group covering 1996; and (3) another sub-group covering 1999. Our results show that the average percentage reductions in market value were 13.8%, 4.58%, and 8.21% respectively. A statistical test reveals that the difference in these changes is indeed statistically significant.<sup>19</sup> This would appear to indicate that from its initial large impact, the MVR may have lost some of its capacity to generate incentives for pollution control. On the other hand, even though the reduction in market value may have lessen over time, such percentage reductions do remain significantly lower than those observed in Canada and the United States (Table 5).

> 18 See Appendix 5 for details.

> 19 See Appendix 6 for details.

20
**Table 7**

**Number of events with and without market reaction over time**

||**With market reaction**|**Without market reaction**|
|---|---|---|
|**1992**|1|0|
|**1993**|14|12|
|**1994**|12|6|
|**1995**|0|5|
|**1996**|15|8|
|**1997**|0|0|
|**1998**|0|0|
|**1999**|10|6|
|**2000**|0|3|

Finally, we examine whether or not the extent of news coverage by media (as measured by the number of newspapers that have covered by the environmental events) may have an impact on the nature and extent of the market reaction. Appendix 4 reports the presence or absence of market reaction for each event, along with the number of newspapers that have reported the particular event. Of those events with market reaction, the average number of newspaper that have covered the event amounts to 1.89 per event; of those events without market reaction, the average number of news coverage is 1.77. Though the difference may not be very large, it does support the assumption that the larger the number of newspapers coverage, the greater the likelihood of market reaction. To this effect, it may be further noted that the 2 events which have been covered by 5 newspapers, and the (one) event that has been covered by 6 newspapers have all experienced market reaction. We have also grouped these events into 3 sub-groups: (1) a sub-group of events which have been covered by 1 or 2 newspapers; (2) a sub-group of events which have been covered by 3, 4, 5 and 6 newspapers; (3) a sub-group of events which have received coverage by 5 or 6 newspapers. Our results reveal an average 21
percentage reduction of market value for each of these sub-groups of 4.46%, 16.1%, and 38.23% respectively.<sup>20</sup> It would thus appear that the larger or wider the coverage of the events by newspapers, which may itself be reflective of the nature and/or importance of the event, the larger the percentage reduction in market value.

# **6. Conclusion**

Since the late 1980’s, the government of Korea has actively implemented a public disclosure program to inform citizens of the fact that some large companies in Korea are not complying with Korean environmental laws and regulations. Perhaps contrary to expectations that capital markets in developing countries may not reach to such news, it was shown in this paper that investors on the Korean Stock Exchange do in fact strongly react to the disclosure of such news. The average reduction in market value was estimated to be much higher than the estimated changes in market value for similar events in Canada and the United States, and of a similar magnitude as observed changes in other developing countries (Argentina, Chile, Mexico, and Philippines). It was further shown that the larger the extent of coverage by newspapers, the larger the reduction in market value, reaching above 35% for those events covered by 5 or more newspapers.

While a number of papers have examined the reaction of stock markets to environmental news, it is not immediately clear whether or not such reactions then induced changes in the actual environmental performance of the involved facilities. This is subject to on-going research.

> 20 The difference between these percentage reductions in market value is statistically significant. See Appendix 7 for details.

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