Equal Employment Opportunity Law and Firm Profitability

Based on a sample of 260 cases reported in the Wall Street Journal between 1964 and 1986, this study finds that the equity value of firms charged with violating equal employment opportunity (EEO) laws fell at the time that a suit, decision, or settlement was announced. Most dramatically, the value of firms involved in class action suits fell 15.6 percent on average around the time of the suit. Further, the average loss to shareholders exceeds the amount firms are required to spend to settle the case. This may be due to the expected costs of changing employment practices or to the information about the firm's management that is revealed by the case.