Investing in Frankenfirms: Predicting Socially Unacceptable Risks

When the public decides that a product or production process is socially unacceptable, the share price of the firms involved may suffer. The danger is that, out of distaste, people will refrain from buying the product or the shares. But being able to assess the degree of unacceptability can mean being better able to assess how it will affect a firm's profitability, and being better able to assess the value of a firm. Over the past twenty-five years, many psychological studies have considered predictors of unacceptability for one class of industrial activities: those perceived as producing risks to health, safety, and the environment. We compare results from several studies of risk perception conducted from 1975-1994 with current consumer boycotts and the screening criteria of socially responsible investment firms-two forms of organized distaste. From both perspectives, high historic ratings on undesirable risk characteristics have predicted current organized aversion. These relationships are discussed in terms of how to make more precise estimates of the direct and indirect effects of social unacceptability on share price. One way is to pay critical attention to the financial disclosures of firms that may have such problems in light of the concurrent state of scientific knowledge. We illustrate these issues with the case of genetically modified organisms.