When #MeToo Strikes: The Effect of Sexual Harassment Allegations on Company Stock Returns

Abstract

Are sexual harassment scandals costly for companies? This thesis introduces a new dataset of 20 publicly traded companies whose executives faced sexual harassment allegations in the past decade. Using an event study methodology, I study the impact of sexual harassment allegations against senior executives on daily stock returns. I find that sexual harassment scandals can be costly to firms, at least in the short term (7 of 20 firms experience significant and large negative returns). Nearly all firms, however, seem to recover by the end of the week following the event. Losses were largest for companies whose: (1) CEOs were accused, (2) executives stayed with the firm, (3) market capitalization was below $75B, and (4) allegations received heavy news volume. When firms do lose market value, there is evidence that this loss can be attributed to the sexual harassment scandal itself, not just often correlated loss of an important manager. From an event study analysis on unexpected CEO death announcements (a benchmark case to isolate for unexpected executive departure from a firm), I find that shareholders do not respond significantly negatively to executive departure. A case study of Google, where the revelation of sexual harassment was after the executive already left the firm, further supports this hypothesis. Next, I find no evidence that shareholders reward corporate announcements aimed at mitigating or preventing sexual harassment (e.g. ending forced arbitration, promoting women) and even estimate negative returns for some announcements. Finally, in light of lawsuits against companies for violating EEOC law (by victims) and for loss in firm value (by shareholders), I present a normative argument that corporations, in addition to individual perpetrators, can be held responsible for compensating harms inflicted by sexual harassment, including paying financial compensation to victims as well as accepting any financial harms to the company. This thesis’s findings can help assess a financially-motivated argument for companies to address sexual harassment in the workplace.