Stock market responses to chemical accidents in Japan: An event study

Abstract

Despite recent major chemical process accidents in Japan, the top management teams of firms still avoid taking costly risk reduction measures because of their low perceived impact on firm performance. The disclosure of information on accident risks might motivate managers to enhance workplace safety because of the subsequent evaluation of firms by investors in stock markets. If the disclosed risk information is newly available for investors, firms with a high risk of accidents would receive a poor evaluation by stock markets and thus managers would take risk reduction measures to prevent stock prices from declining. In this study, we conduct an event study analysis to examine whether accident risk information is already reflected in stock prices, using data on the Japanese chemical industry. The results of our event study show that the estimated cumulative average abnormal returns of firms' stocks are significantly negative after severe accidents actually occurred. This finding implies that risk information is not already reflected in the stock prices of Japanese chemical firms and that the disclosure of accident risk information has the potential to motivate the top management teams of firms to reduce their firms’ accident risk.