Abstract
The impact of commercial airplane crashes on the shareholder wealth of US-listed airline stocks has been the focus of many prior studies, but none have explored the concomitant impact on trading volume. We expand the scope of prior studies to include near crashes. We examine 262 ‘incidents’ from 1962 to 2018 (220 with return evidence) and document a significant (negative) wealth impact for crashes with fatalities and casualties, and an insignificant impact for incidents with no casualties. We find that log-transformed trading volume spikes upward in the three-day crash-period window and that trading volume remains abnormally high in the three plus weeks that follow the crash when casualties occur. We interpret the high level of post-event trading to be consistent with a noise trader hypothesis: naïve trading hoping to take advantage of airline stock over-reaction – which we do not detect.
Highlights
The crash or near crash of a commercial airplane is almost always a devastating event for passengers and crew alike
Numerous studies document a significant negative impact of a crash on the market value of the airline. These studies generally conclude that relative the relative impact changed little with the de-regulation of the airline industry in the 1970s (Note 1), that competitors of the ‘crash’ airline experienced a small uptick in value consistent with an expected switching behavior by consumers, but there was a small downtick in the value of all airlines consistent with the hypothesis that consumers were concerned about the overall safety of the industry (Note 2)
This study updates our understanding of the impact of airline crashes, near-crashes, and accidents which took the life of ground personnel on shareholder wealth
Summary
The crash or near crash of a commercial airplane is almost always a devastating event for passengers and crew alike. This study updates our understanding of the impact of airline crashes, near-crashes, and accidents which took the life of ground personnel (but not passengers or crew) on shareholder wealth. This broader definition of an ‘incident’ provides an opportunity to more fully examine the behavior hypothesis put forward by Kaplanski and Levy (2010). Whilst virtually all our evidence conforms to what one would expect in an informationally efficient market, we find the persistent increase in trading volume after accidents with casualties (with little promise of significant price changes) to be more consistent with the noise trader hypothesis. Whilst virtually all our evidence conforms to what one would expect in an informationally efficient market, we find the persistent increase in trading volume after accidents with casualties (with little promise of significant price changes) to be more consistent with the noise trader hypothesis. (Note 7)
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