Can Old Sin Make New Shame? Stock Market Reactions to the Release of Movies Re-Exposing Past Corporate Scandals

On November 12, 2019, a movie named Dark Waters was premiered in North American theaters. This widely commended movie revisited a dark history of a chemical firm — DuPont, highlighting the true story of how a tenacious attorney fought against DuPont on behalf of numerous victims of the environmental misconduct of the firm. During DuPont’s earnings call prior to Dark Waters’ release, some investors expressed concerns that the movie would cast a shadow over DuPont shares. However, many analysts believed that the price reaction of DuPont’s stock to this movie, if any, would quickly fade as the featured water contamination scandal was revealed to the public years before the movie release. The impact of this movie turned out to be surprisingly prominent — Dark Waters incited significant and persistent negative stock market reactions towards DuPont: The stock price of DuPont took a major dive, dropping by 9.08% over the first week after the movie was premiered on November 12, 2019, and further slumping by another 1.42% over the second week.

Dark Waters rakes up DuPont’s past scandal that has been public information years before its release. Specifically, the featured class action lawsuit against was settled in 2005, and the related controversial topic was also reported by a New York Times article in 2016. Therefore, it is intriguing to see that the re-exposure of such an old scandal can still impair shareholder value after its original dust has long settled. Meanwhile, it is widely studied in corporate scandal literature that the initial exposure of a firm’s deviant conducts results in losses in the value of the focal firms’ stocks. The aforementioned pronounced and persistent market reactions to Dark Waters’ release, however, provide an instructive example that the true cost of corporate scandals documented in previous studies is likely to be understated. In this regard, does DuPont’s case also apply to other companies whose past publicly known scandals are resurfaced on big screens? In this paper, we systematically examine whether and how the release of movies reiterating past corporate scandals (hereon, scandal re-exposing movies) can incur significant market reactions towards firms featured in those movies.

We manually construct a sample of 54 movie-firm observations. Using this sample, we first explore whether stock markets would respond to the public release of the scandal re-exposing movies. We calculate cumulative abnormal returns (CARs) of the stocks of the firms whose past scandals are re-exposed by the sample movies (hereon, event stocks) around movie releases. As most movies’ cinema release period, along with their attention life cycle, will commonly end after four to six weeks, we track stock market reactions within 30 trading days following movie releases. We find that the average CARs of the event stocks are significantly negative around various event windows. For example, the average CAR is −5.86% over the event window [−1, 30]. Next, as discussed, these movies feature old corporate scandals that are publicly known. Prior studies find the stock market reactions to stale news tend to be fully reversed subsequently and attribute the findings to investor overreaction. So we further examine whether the initial negative stock price reactions to movie releases documented above would quickly reverse. We first calculate CARs of the event stocks over several post-event windows (e.g., [31, 60], [31, 120], and [31, 252]), and find no evidence of return reversals. As a robustness check, we also calculate the buy-and-hold abnormal returns (BHARs) of event stocks over varying holding periods and find both economically and statistically significant negative BHARs. These findings indicate that not only the event stocks witness economically and statistically significant negative returns around the movie releases, but also such negative returns persist even after the public attention directly attracted by those scandal re-exposing movies fades away.

Drawing on the insights from psychology and communication studies, we posit that these scandal re-exposing movies effectively refocus public attention on the past corporate scandals and induce broad negative public attitudes and perceptions towards the firms featured in these movies. Such adverse perceptions can incur significant moral costs for focal firms, causing a permanent discount in the valuation of their stock by decreasing firms’ future cash flows and/or increasing investors’ required rate of returns. Specifically, a variety of stakeholders would be concerned about the focal firms’ moral stances and ethical risks, thus negatively affecting the focal firms’ future cash flows. For example, socially conscious consumers could become reluctant to buy products of the focal firms. Moreover, the adverse public perception would also drive investors to require higher returns on the stocks of the focal firms. First, investors would require a higher return to compensate for the increased operational risks. Second, investors could simply dislike the focal firms’ stocks. This increases the level of subjective risk that plays a role in the behavioral asset pricing model and thus increases the required return. Third, some socially conscious investors will exclude the focal firms from their investment opportunity set, which reduces the investor base and risk-sharing of the stocks. Thus, other investors would require higher returns on these stocks. Fourth, the increased public awareness may bring the matters to policymakers and induce further regulatory actions. The increased litigation risks will thus increase the required return.

The above propositions have the following implications. First, one should expect that the negative abnormal returns are more pronounced for firms featured in the more popular movies. To test this implication, we run cross-sectional regressions of CARs and BHARs of the event stocks on proxies for movie popularity, including movie box office and movie media coverage, and indeed find a significantly negative relationship as expected. Second, based on the above propositions, the documented negative stock market reactions could be associated with a decrease in firms’ future cash flows and/or an increase in required rate of returns. We find that after the release of scandal re-exposing movies, analysts significantly revise down their earnings forecasts of firms featured in those movies (treatment group) as compared with unfeatured industry-and size-matched firms (control group). We also find that the implied costs of capital of the treatment group increase as compared with the control group, and the increases are more pronounced for firms whose scandals are re-exposed by the more popular movies.

Our study sheds fresh light on the impact of corporate scandals, stale information, and media on stock returns. First, our finding implies that the true cost of corporate scandals might be understated in the previous literature that examines the impact of the initial revelation of a scandals on the focal firm’s equity value. Second, prior studies show that stock returns caused by stale information are fully reversed subsequently, while we find the release of scandal re-exposing movies, as a special form of stale information reiteration, triggers permanent stock market reactions. We attribute such differences to the rather broad and pronounced public and social influence of the scandal re-exposing movies as compared with other forms of stale information re-exposure. In this regard, our study elucidates on the potential boundary conditions of market reactions to stale information. Third, our study contributes to the stream of literature exploring the impacts of media on stock returns using the unique setting of scandal re-exposing movies.

The full paper is available for download here.