Investor Reactions to Food Safety Incidents: Evidence from the Chinese Milk Industry

Posted: 14 Sep 2013

See all articles by Yunhao Dai

Yunhao Dai

Independent

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Maobin Wang

University of International Business and Economics - School of Banking and Finance

Date Written: September 12, 2013

Abstract

Using a natural experiment in the Chinese milk industry as background, this paper investigates the reactions of individual and institutional investors to food safety incidents. By classifying firms as either honest or dishonest, we find that: First, honest firms significantly outperform dishonest ones and receive more investment flow. Second, individual investors react to incidents more negatively and intensely, especially toward dishonest firms, compared with institutional investors. This study offers important policy implications: First, our findings directly suggest that the government should enact appropriate policies to strengthen food safety and protect consumers’ health. Second, the government should implement efficient mechanisms to strengthen firms’ incentives to participate in social responsibility activities. Third, having institutional investors as corporate monitors is not a sufficient substitute for legal penalties.

Keywords: Food safety incidents, Investor reaction, Firm values, Event study, Difference-in-differences

Suggested Citation

Dai, Yunhao and Kong, Dongmin and Wang, Maobin, Investor Reactions to Food Safety Incidents: Evidence from the Chinese Milk Industry (September 12, 2013). Food Policy, Vol. 43, 23-31, 2013, Available at SSRN: https://ssrn.com/abstract=2324766

Yunhao Dai

Independent ( email )

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Maobin Wang

University of International Business and Economics - School of Banking and Finance ( email )

Beijing, 100029
China

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