Do Industrial Incidents in the Chemical Sector Create Equity Market Contagion?

INTRODUCTION This paper examines a number of US chemical industry incidents and their effect on equity prices of the incident company. Furthermore, this paper then examines the contagion effect of this incident on direct competitors. METHOD Event study methodology is used to assess the impact of chemical incidents on both incident and competitor companies. RESULTS This paper finds that the incident company experiences deeper negative abnormal returns as the number of injuries and fatalities as a result of the incident increases. The equity value of the competitor companies suffer substantial losses stemming from contagion effects when disasters that occur cause ten or more injuries and fatalities, but benefit from the incident through increasing equity value when the level of injury and fatality is minor. CONCLUSIONS Presence of contagion suggests collective action may reduce value destruction brought about by safety incidents that result in significant injury or loss of life. PRACTICAL APPLICATIONS This research can be used as a resource to promote and justify the cost of safety mechanisms within the chemical industry, as incidents have been shown to negatively affect the equity value of the not just the incident company, but also their direct competitors.