The Stock Price Reaction to the Challenger Crash: Information Disclosure in an Efficient Market

20 Pages Posted: 26 Dec 1998  

Michael T. Maloney

Clemson University - John E. Walker Department of Economics

J. Harold Mulherin

University of Georgia - Department of Banking and Finance

Date Written: December 7, 1998

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.

JEL Classification: G14

Suggested Citation

Maloney, Michael T. and Mulherin, J. Harold, The Stock Price Reaction to the Challenger Crash: Information Disclosure in an Efficient Market (December 7, 1998). Available at SSRN: https://ssrn.com/abstract=141971 or http://dx.doi.org/10.2139/ssrn.141971

Michael T. Maloney (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-3430 (Phone)
864-656-4192 (Fax)

J. Harold Mulherin

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-3644 (Phone)

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