Ah, found this on another forum, hope it helps. I had heard that they can cause respiratory irritation, but I didn't know all the whys of it...interesting stuff.
"Softwoods (such as cedar and pine) contain aromatic hydrocarbons and phenols which can cause respiratory problems, allergic reactions and changes in the liver. It has nothing to do with if the animals eat the wood shavings, or whether they are wet or dry.
Studies on workers in sawmills working with softwoods like cedar and pine have shown these woods to cause respiratory problems in humans - hence why sawmill workers wear face masks/respirators. Other problems such as conjunctivitis and asthma in humans have also been mentioned in connection with cedar shavings. Studies with laboratory animals have also shown dramatic changes in liver enzymes with animals kept on cedar bedding.
Cedar is a worse offender than pine, and kiln drying (at least with pine, not sure about cedar) releases the phenols and hydrocarbons (and their smell) and so then reduces/removes the risk/affects of them. However, wood shavings directly from a sawmill haven't been kiln dried but are "raw". If bought packaged from a supplier and supplied as bedding for pets the wood shavings may have gone through a kiln drying process (ie processed pine shavings).
I am not aware of any study into the effects/non-effects of "raw" cedar or pine specifically with regard to horses but I do remember reading that some horses have had allergic reactions to cedar - some immediately, and some only after being kept on it for a while and that the hydrocarbons can also cause coughing in some horses.
Knowing that it affects both laboratory animals and humans, it is hard to imagine that it wouldn't also have some effect on other animals such as horses though. However, as horses are much larger than both laboratory animals and humans the effects may well be far less or at least less obvious or may simply require a longer period for the effects to be noticeable.
Knowing that cedar is the worst offender of the two and that it can cause problems in humans and other animals, and knowing that whoever owns/mucks out the horse is being exposed to it on a daily basis, I wouldn't personally use unprocessed cedar shavings and certainly would think it best avoided by people such as asthmatics, etc."