Location matters: Valuing firm‐specific nonmarket risk in the global mining industry

• Date: 01 July 2020
• Author: Jiyoung Shin,Shuna Shu Ham Ho,Daniel Shapiro,Chang Hoon Oh
• Published date: 01 July 2020
• DOI: http://doi.org/10.1002/smj.3153

RESEARCH ARTICLE

Location matters: Valuing firm-specific

nonmarket risk in the global mining industry

Chang Hoon Oh

1

| Daniel Shapiro

1

| Shuna Shu Ham Ho

1

|

Jiyoung Shin

2

1

Beedie School of Business, Simon Fraser University, Vancouver, British Columbia, Canada

2

Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands

Correspondence

Chang Hoon Oh, Beedie School of

Business, Simon Fraser University,

500 Granville Street, Vancouver, British

Columbia Canada.

Email: coh@sfu.ca

Funding information

Social Sciences and Humanities Research

Council of Canada, Grant/Award

Number: 435-2017-0897

Abstract

Research summary:Using collective action and social

movement theory, we investigate the potential incen-

tives and ability of stakeholders to engage in collective

action that can increase firm-specific nonmarket risk of

mining companies. We argue that proximity to the

nearest environmentally sensitive water source

increases the probability that local stakeholders will

take collective actions that impose material costs on the

focal mine. We hypothesize that stock markets recog-

nize this nonmarket risk and apply a discount on

announcements related to mines located near such

areas, and that these risks are moderated by the type of

mineral, the nature of the water source, and the

strength of host country institutions. Using a unique

data set and an event study method, we find support

for most of our arguments.

Managerial summary:We argue that mines located

near environmentally sensitive water sources are sub-

ject to nonmarket risks arising from the potential col-

lective actions of local stakeholders and their allies.

Stakeholder mobilization can impose material costs on

a mine in the form of delays, regulatory hurdles, and

Received: 7 February 2018 Revised: 14 January 2020 Accepted: 17 January 2020 Published on: 3 April 2020

DOI: 10.1002/smj.3153

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2020 The Authors. Strategic Management Journal published by John Wiley & Sons, Ltd. on behalf of Strategic Management Society.

1210 Strat Mgmt J. 2020;41:1210–1244.wileyonlinelibrary.com/journal/smj

closure. We find that stock markets recognize these

nonmarket risks and apply a discount on announce-

ments by mining companies whose mines are located

near environmentally sensitive water sources, particu-

larly rivers. However, we also find that investor reac-

tion is stronger in countries with strong institutions

that support collective action. Thus, nonmarket risk

management is important even in countries that are

typically characterized by low political and institutional

risks. We discuss the degree to which these results can

be generalized beyond mining.

KEYWORDS

collective action, institutions, mining, nonmarket risk, social

movements

1|INTRODUCTION

Firm-specific nonmarket risks arise from a variety of social, political, and environmental events

that can impose material costs on a firm (Doh, Lawton, & Rajwani, 2012; Lawton, McGuire, &

Rajwani, 2013). Research on nonmarket risks has for the most part focused on political and

institutional risks (Henisz & Zelner, 2012; Holburn & Zelner, 2010; Lawton et al., 2013;

Werner, 2017), but there is increasing evidence that stakeholder mobilization through social

movements can materially affect a focal firm (de Bakker, den Hond, King, & Weber, 2013;

Dorobantu, Henisz, & Nartey, 2017; Henisz, Dorobantu, & Nartey, 2014; King & Soule, 2007),

making the management of such stakeholders a critical feature of corporate strategy.

In this study, we use the theory of collective action (Olson, 1965; Ostrom, 2000) together

with the theory of social movements (Davis, Morrill, Rao, & Soule, 2008; Kriesi, 2004; McAdam,

McCarthy, & Zald, 1996) as applied to stakeholders (King, 2008) to argue that the potential for

localized negative externalities created when a firm located near environmentally sensitive

water sources provides both the incentive and ability for local stakeholders to engage in collec-

tive action to prevent such externalities. We apply this logic to the global mining industry and

argue that collective action, based on fear of scarcity and contamination of water, is more likely

the closer a mine is to an environmentally sensitive water source, and that the threat from col-

lective action constitutes a potential firm-specific nonmarket risk. Previous studies examine the

impact of stakeholder groups that have already formed in response to a firm's actions

(Dorobantu, Henisz, et al., 2017; Godfrey, Merrill, & Hansen, 2009; McDonnell, King, &

Soule, 2015; Vasi & King, 2012), we examine the ex ante conditions under which they are likely

to form and take action to prevent the potential negative effects of a firm's actions.

We use collective action theory to analyze the incentives for groups to act. The theory of col-

lective action (Olson, 1965) suggests that within a group, the possibility of collective action is

limited by the free rider problem. We argue that the localized negative externality of mining

activities (Shapiro, Hobdari, & Oh, 2018) concentrates costs and thereby increases the incentive

to undertake collective action. In addition, because the externality often affects traditional local

OH ET AL.1211

communities, the incentive to collective action is further increased because shared values and

interests solidify trust and reciprocity, which in turn limits free riding (Ostrom, 2000; Rowley &

Moldoveanu, 2003).

We elaborate on this argument using social movement theory to evaluate the ability of

groups to undertake collective action. Social movement theory typically focuses on specific

forms of collective action, often but not exclusively associated with groups undertaking actions

outside of institutional or organizational channels (Snow, Soule, & Kriesi, 2004). However, it

has also been applied more generally to collective action by stakeholders of various kinds orga-

nizing both within and outside of existing institutional structures (King, 2008; McAdam

et al., 2010), with firms often being the targets. Social movement theory points to three critical

mechanisms that facilitate collective action (Giordono, Boudet, Karmazina, Taylor, &

Steel, 2018; King, 2008; McAdam et al., 1996). These are the ability to mobilize resources (mobi-

lizing structures); the strength and accessibility of government (political opportunities); and the

ability to frame issues so as to mobilize not only the local community but also more distant

communities and supportive stakeholders (framing structures).

Drawing on the experience of the global mining industry, we develop and test four hypothe-

ses focusing on mine location, both within and across countries. First, we argue that mines

located near environmentally sensitive water sources are subject to cost-increasing collective

actions by local stakeholders. We argue, in particular, that the potential for mines to inflict

damage on local water supplies and to compete for scarce water resources creates a stronger

incentive to engage in collective action, and in addition enhances the ability to mobil ize com-

plementary institutions including government and the courts, and to frame issues to attract

media and NGO attention. We therefore hypothesize that mine location within a country, mea-

sured in terms of proximity to the nearest significant water source, adjusted for the degree of

risk to water quantity and quality, increases firm-specific nonmarket risk so that stock markets

respond negatively to announcements related to mines located near such areas.

We consider three different factors moderating the effect of mine location. We first argue

that the effect of mine location is moderated by the nature of the ore being mined. Specifically,

we hypothesize that gold mines carry more ex ante risk than other mines because the technol-

ogy associated with gold mining requires extensive use of water and increases risks of water

contamination. We then argue that the type of the nearest water source also matters, and we

thus distinguish mines located near rivers from those located near lakes. We argue that mines

located near rivers are subject to greater risk because rivers extend the number of affected com-

munities, thus increasing the probability of diffused collective action.

Finally, we consider differences across countries and institutional contexts. We develop a

specific measure of institutional context based on the capacity of a country's institutions to sup-

port collective action and social movements, and we argue that collective action that imposes

costs on companies is more likely in countries where such institutions are strong. Drawing on

both social movement theory and institutional theory, we suggest that when government access

freedom of the press and the judicial system are strong, collective action is better tolerated, and

stakeholders are better able to access relevant resources, including government resources. Thus,

we hypothesize that stock markets' negative response associated with within-country mine

proximity increases in host countries with strong institutions that support collective action.

To test our hypotheses, we construct a unique data set that includes exact measures of mine

location in each country, and these are matched to the proximity of the nearest significant

water source, as defined by the World Wide Fund for Nature (WWF) (Lehner & Döll, 2004) and

the World Resources Institute (WRI) (Gassert, Luck, Landis, Reig, & Shiao, 2014). We employ

1212 OH ET AL.