What does it take for the stock market performance of a fossil fuel company to be affected? Something more than the explosion of an oil drilling rig and the death of a group of workers, apparently; more than an oil leak with devastating consequences for the entire local ecosystem. A new study looked at the 2010 Deepwater Horizon accident and found the finances of the company in charge weren’t significantly affected.
BP, formerly British Petroleum, had been leasing an offshore oil drilling rig called Deepwater Horizon in the Gulf of Mexico. On April 20, 2010, the rig exploded, killing 11 workers and causing the largest oil spill in US history. While industrial accidents can affect the reputation and finances of companies, the extent of the impact on BP was unclear.
Researchers from the University of Washington and the London School of Economics wanted to find out how this accident affected the corporate reputation and the stock market return of Deepwater’s operating firm. To date, BP has paid over $60 billion to settle criminal and civil complaints along with other fines due to the oil drilling rig explosion.
“Can we depend on the stock market to discipline first? The answer is no,” Aseem Prakash, study author and UW researcher, told ZME Science. “Fossil fuels are not going away any day now but we can demand higher safety standards, for example preventing methane leakage. “It’s the most profitable sector, outperforming everybody else.”
Looking at BP’s impacts
To better understand the impacts on BP, the researchers used a method known as synthetic control analysis. They compiled data on companies similar to BP to create a synthetic brand, representing how BP would have fared if the accident hadn’t happened. Then, they compared BP’s reputation and stock performance to one of the synthetic brands.
BP’s reputation dropped 50% after the Deepwater Horizon accident and remained impaired through 2017, when compared to the hypothetical reputation of the synthetic brand. However, while BP’s stock price dropped immediately affect the accident, longer-term stock markets didn’t decline significantly compared to the returns of the synthetic brand.
This effect (or lack of it) on BP’s stock price, holds true for a mid-term period of one to two years after the accident and a long-term period of two to seven years. In terms of spillover effects, the researchers didn’t find any evidence that the Deepwater accident affected the reputations or the stock market returns of other fossil fuel companies, such as BP’s contractors.
The findings suggest industrial accidents have long-lasting effects on a company’s reputation but don’t necessarily affect long-term stock market performance or the reputation and stock prices of similar companies. The researchers suggested a number of reasons behind these findings, noting markets don’t create enough incentives to promote industrial safety.
“Reputations could be influenced by consumers’ product experience and value perceptions, while stock market returns could be affected by profits, new product launches, and market volatility. Arguably brand reputations could certainly affect stock market returns but the opposite effect is less plausible,” the researchers wrote in their paper.