Stock Market Reactions to Industrial Disasters: Evidence from Incident Firms and Their Competitors

Abstract

My paper analyzes the impacts of chemical disasters on both incident firms and non-incident firms. I consider a sample of 58 explosions in chemical plants in the U.S. over the period 1990-2017. Using event study, I find that incident firms on average experience a statistically and economically significant drop in market value following chemical disasters, and the negative impacts are permanent. In addition, my paper finds that on average the equity value of competitor firms suffers significant losses stemming from contagion effects; however, competitive effects dominate when accidents are minor. Using cross-sectional analysis, I show that the loss is significantly related to the severity of the incident as measured by causalities and by chemical pollution. Therefore, my research can be used to promote and justify the cost of safety mechanisms in the petrochemical industry.

Sijia Fan

PhD student in Applied Economics and Management

My research interests include empirical finance and environmental economics.