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Science and the Stock Market: Investors’ Recognition of Unburnable Carbon

UCD-ITS-RP-14-03

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Suggested Citation:
Dominguez-Faus, Rosa, Paul Griffin, Amy Myers Jaffe, David Lont (2014) Science and the Stock Market: Investors’ Recognition of Unburnable Carbon . Social Science Research Network, 1 - 36

How well does the press serve the public and company stakeholders when it comes to reporting significant discoveries from science? This paper documents the stock market’s reaction to findings reported in a 2009 article in the highly prestigious Nature journal of science reporting that only a fraction of the world’s existing oil, gas, and coal reserves can be emitted if global warming by 2050 is not to exceed 2oC above pre-industrial levels. The Nature article is now one of the most cited environmental science studies in recent years. What the scientists did not say, but could be reasonably understood from the paper, was that such knowledge could cause havoc to fossil fuel companies’ stock prices, whose value hinges significantly on their recoverable reserves. Our analysis indicates that this publication prompted at most an average drop in stock price of 2% for our sample of the 63 largest U.S. oil and gas companies. Later, in 2012-2013, the press “discovered” this article, and then wrote hundreds of stories on the grim consequences of unburnable carbon for fossil fuel companies. Our evidence shows only a small negative reaction to these later stories, mostly in the two weeks following their publication. The overall stock price reaction to all stories from 2009 to the present represents a shareholder loss of $27 billion or 2.48% of the total market capitalization of our sample. This limited but detectable market response contrasts with the predictions of some analysts and commentators of a substantial decline in the shareholder value of fossil fuel firms from a carbon bubble. Our paper discusses possible reasons for this discrepency.

Keywords: U.S. oil and gas companies; unburnable carbon; stranded assets; Meinshausen; Nature science journal; media attention; event study