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On the Stock Market’s Reaction to Major Railroad Accidents

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  • Walker, Thomas J.
  • Pukthuanthong, Kuntara
  • Barabanov, Sergey S.

Abstract

This study examines the impact of train accidents on the stock price performance of the involved railroad companies. We employ a sample of 26 accidents involving trains operated by publicly traded U.S. and Canadian railroad companies between January 1993 and December 2003. Event study methodology is used to measure the abnormal performance of the involved railroad firms to these accidents. In addition, a series of univariate tests and cross-sectional regression analysis is employed to determine the factors that drive the abnormal returns for the firms in the sample. The magnitude of the initial price decline appears to be driven by various characteristics of both the firm and the accident itself. Specifically, there is strong evidence that suggests that one of the main determinants of the abnormal returns is expected legal liability claims against the railroads. Abnormal performance is negatively related to firm size and the number of injuries and fatalities resulting from the accident. In addition, accidents that result in hazardous material spills cause significantly larger stock price drops in the days following the event. Finally, investors appear to differentiate between accident causes. Accidents caused by reckless or illegal behavior on behalf of one or more of the railroad company’s employees result in particularly large price declines. Accidents caused by mechanical failures or signal malfunctions, on the other hand, only cause small stock price drops.

Suggested Citation

  • Walker, Thomas J. & Pukthuanthong, Kuntara & Barabanov, Sergey S., 2006. "On the Stock Market’s Reaction to Major Railroad Accidents," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 45(1).
    • Handle: RePEc:ags:ndjtrf:206779
    DOI: 10.22004/ag.econ.206779
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    References listed on IDEAS

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    1. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    2. Bowen, Robert M. & Castanias, Richard P. & Daley, Lane A., 1983. "Intra-Industry Effects of the Accident at Three Mile Island," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(1), pages 87-111, March.
    3. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
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    Cited by:

    1. Thomas J. Walker & Dolruedee Thiengtham & Onem Ozocak & Sergey S. Barabanov, 2007. "The role of indemnification agreements and legal liability in railroad disasters," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 3(4), pages 338-359, October.
    2. Elisa Navarra, 2022. "Stock Market Response to Firms’ Misconduct," Working Papers ECARES 2022-40, ULB -- Universite Libre de Bruxelles.
    3. Carpentier, Cécile & Suret, Jean-Marc, 2015. "Stock market and deterrence effect: A mid-run analysis of major environmental and non-environmental accidents," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 1-18.
    4. Halkos, George & Managi, Shunsuke & Zisiadou, Argyro, 2017. "Analyzing the determinants of terrorist attacks and their market reactions," Economic Analysis and Policy, Elsevier, vol. 54(C), pages 57-73.
    5. Halkos, George & Zisiadou, Argyro, 2016. "Exploring the effect of terrorist attacks on markets," MPRA Paper 71877, University Library of Munich, Germany.

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