Researchers Investigate the Financial Fallout from Child Labor Law Violations

Findings indicate that a dip in stock prices may only be temporary

Research conducted by two professors at San Diego State University’s Fowler College of Business indicates that news of child labor abuse by firms listed in the S&P Index results in a decline in stock prices immediately after the news breaks. However, the research also notes that the decline is usually short-lived, and generally lasts for a period of about two weeks. 

Child Labor Abuse on the Rise While Investors Stay Silent
SDSU accounting professor, Tonni Xia, and finance professor, Liang Ma, began their research after Xia read an article in the Wall Street Journal documenting the use of child labor in a Minnesota company while the company’s investors stayed silent. Further investigation revealed a dramatic increase in child labor law violations since 2018 according to the U.S. Department of Labor. 

With this information in mind, Xia and Daniela Peregrino Cecena, a second-year SDSU student double majoring in sociology and political science, conducted research on public companies who were accused of child labor violations and how investors reacted to the news. Peregrino Cecena presented the findings during the SDSU Undergraduate Research Program (SURP) in the summer of 2024. 

The information Peregrino Cecena presented during the program was sobering. 

“I ended up finding news reports about 56 companies involved in child labor abuse from 2011 to 2024,” said Peregrino Cecena. “I found that reports of child labor abuse increased since 2010, with the number of cases peaking in 2023. I also found most of the news covered abuse in the consumer goods industry with the largest firms — represented by the S&P 500 — having the most cases reported.” 

The findings also indicated that once the news was reported, some of the company’s stock prices dropped from the previous day’s closing price, with the overall share price for the 56 companies being down an average of only 6%.

A Deeper Dive into the Results
Using the data gathered with Peregrino Cecena, Xia and Ma worked on a deeper analysis of the market reaction for the 56 companies. They reached the conclusion that, based on the relatively small downturn in stock prices, individual investors seemed to pay little attention to the reports of child labor abuse. 

Open the image full screen.

However, stock prices for companies with a higher percentage of institutional investors (such as mutual funds, financial institutions, etc.), coupled with news coverage from national media outlets, suffered the most significant drop. “Institutional investors often have more resources and financial expertise, leading them to process and react to corporate misconduct more quickly and decisively than individual investors,” noted Ma. 

Xia and Ma also reported that existing research indicated that investors had become more sensitive to a company’s environmental, social and governance (ESG) performance in recent years, and that child labor abuses fit into an ESG scenario. However, they also found that investors’ negative reactions to environmental disasters (such as an explosion) were generally stronger than news of societal factors (such as illegal use of child labor). 

News Reports Impact Investor Reactions
The professors also found that the investors’ seemingly short attention span to reports of a company’s child labor violations may be due to a lack of national news coverage, which seemed to drop off the media’s radar screen approximately two weeks after the initial report. “While there is clearly a short-term negative impact on stock prices, the lack of long-term visibility may also account for the apparent shareholder indifference to these issues,” Xia explained. 

Open the image full screen.

These findings may become even more noteworthy because of recent state proposals that would roll back child labor protections in some states, with Florida being the latest to do so. Should these proposals be enacted by state legislators, individual investors’ reactions, as well as those of institutional investors to the use of corporate child labor may require additional research. 

“Perhaps most significantly, we noticed that the downward drift for companies with more institutional investors continues for only a short time after the initial news report,” said Ma. “The prolonged negative performance indicates that the market continues to adjust negatively as the implications of child labor abuse become more fully factored into their stock valuations. It’s worth noting that while our sample focuses on U.S. firms, this issue obviously has global implications.”