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The role of indemnification agreements and legal liability in railroad disasters

Author

Listed:
  • Thomas J. Walker
  • Dolruedee Thiengtham
  • Onem Ozocak
  • Sergey S. Barabanov

Abstract

Purpose - The study aims to examine the stock price performance of publicly owned railroad companies following severe railroad accidents that resulted in the loss of human lives and/or hazardous material spills. The focus is on legal liability considerations as one of the primary factors that drives a firm's abnormal performance following a given accident. Design/methodology/approach - This paper employs a sample of 97 railroad accidents that occurred between January 1967 and December 2006 and involved equipment (tracks and/or locomotives) owned by publicly traded US and Canadian railroad companies. The stock price reaction of the affected firms is examined following these disasters and a series of univariate and multivariate tests is used to investigate whether differences in abnormal returns following a given accident can be related to various factors that characterize the affected firm or the accident it was involved in. Findings - The results suggest that legal liability considerations are one of the primary factors that determine a company's stock price reaction following a railroad disaster. Specifically, it is observed that firms that are likely to be sued in connection with an accident tend to incur larger stock price losses. On the other hand, it is found that firms that are protected through indemnification agreements suffer only insignificant price declines, even if initial accident reports hold them responsible for causing the accident. Originality/value - The paper extends the prior literature on the stock market's reaction to firm‐specific catastrophic events. While there are a number of studies that examine the financial consequences of aviation disasters, there is to the authors' knowledge only one prior study that performs a similar analysis for railroad accidents.

Suggested Citation

  • 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.
    • Handle: RePEc:eme:ijmfpp:v:3:y:2007:i:4:p:338-359
    DOI: 10.1108/17439130710824352
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    References listed on IDEAS

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    1. Borenstein, Severin & Zimmerman, Martin B, 1988. "Market Incentives for Safe Commercial Airline Operation," American Economic Review, American Economic Association, vol. 78(5), pages 913-935, December.
    2. 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(01).
    3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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