The Effect of the Rana Plaza Disaster on Shareholder Wealth of Retailers: Implications for Sourcing Strategies and Supply Chain Governance

Abstract

Supply chain and reputational risks are often assumed to motivate firms to source production in developed, high-cost countries rather than developing, low-cost countries. To examine this assumption, we provide evidence from the collapse of the Rana Plaza building on April 24, 2013, which with its 1,133 fatalities and 2,438 injuries is seen as one of the worst industrial accidents in history. This paper analyzes the stock market reaction to the Rana Plaza disaster in the Bangladeshi ready-made garment industry. Sufficiently negative stock market reaction might motivate firms to shift their sourcing strategy. Our analysis is based on a sample of 39 publicly-traded global apparel retailers with significant garment sourcing in Bangladesh. Although stock market reaction to retailers on the day of the Rana Plaza disaster is negative, its magnitude and significance dissipates when considering the following day’s stock market reaction. There is no evidence of significant stock market reaction over 11 trading days (approximately two weeks in calendar time) after the Rana Plaza disaster. Subsequent to the disaster, retailers developed two different agreements to improve factory and worker safety in Bangladesh – the Accord on Fire and Building Safety in Bangladesh (AFBSB), and the Alliance for Bangladesh Worker Safety (ABWS). We find no evidence of significant stock market reaction to the announcements of the AFBSB and the ABWS. From a retailer perspective, since negative economic impacts from the Rana Plaza disaster were insignificant, they have little economic incentive to move sourcing out of Bangladesh or other low-cost countries. We discuss the implications of our results for retailers, non-governmental organizations (NGOs), garment factory owners in Bangladesh, the Bangladeshi government, as well as academic researchers.

Keywords: responsible sourcing, supply chain governance, corporate reputation, stock market reaction, industrial accidents