progress in economics

Doug Henwood dhenwood at panix.com
Mon Feb 8 18:47:24 PST 1999


[Clinical evidence indeed.]

"The Stock Price Reaction to the Challenger Crash: Information

Disclosure in an Efficient Market"

BY: MICHAEL T. MALONEY

Clemson University

HAROLD MULHERIN

Pennsylvania State University

Document: Available from the SSRN Electronic Paper Collection:

http://papers.ssrn.com/paper.taf?abstract_id=141971

Other Electronic Document Delivery:

http://www.clemson.edu/~maloney/901/Challenger

Crash.pdf

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Date: December 7, 1998

Contact: MICHAEL T. MALONEY

Email: Mailto:maloney at clemson.edu

Postal: Clemson University

Clemson, SC 29634 USA

Phone: (864)656-3430

Co-Auth: HAROLD MULHERIN

Email: Mailto:jhm14 at psu.edu

Postal: Pennsylvania State University

Middletown, PA 17057-4898 USA

ABSTRACT:

In this paper, we provide clinical evidence on market efficiency

by studying stock price movements around a particular event--the

explosion of the Space Shuttle Challenger. Our work is motivated

by the continuing debate on whether the market quickly and

accurately processes information. A group of researchers have

long argued that stock prices exhibit excess volatility and

anomalous patterns that cannot be explained only by information.

We provide contradictory evidence. We study an event in which

investor panic could easily lead to initial overreaction, and

because the government investigation of the cause of the crash

took five months, one might expect a delayed stock market

reaction to the crash. What we find is that the market

pinpointed the guilty party within minutes, and while there was

some "excess volatility" associated with trading in the

non-culpable firms, this provided little or no profit to traders

with inside information.



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