Tarred and Untarred by the Same Brush: Exploring Interdependence in the Volatility of Stock Returns

When a firm suffers a major accident, its stock price is likely to become more volatile, but does this accident also increase the volatility of the stocks of rivals? Following a major accident, rivals sometimes unite through their trade association to implement an industry self-regulatory program. Do such collective efforts help to stabilize the stocks of firms in these threatened industries? This paper presents a longitudinal empirical study of the influence of a major accident by a single firm – Union Carbide's deadly poison gas leak in Bhopal, India – on the volatility of the stock prices of other chemical firms, and the influence of this industry's intensive collective efforts to recover from this major accident – the American Chemistry Council's Responsible Care Program – on the stock price volatility of these same firms. Results indicate that the volatility of the stocks of chemical firms increased after Union Carbide's tragic accident and that this volatility decreased for Responsible Care members but not for non-members. These findings suggest that a firm's stock price may be destabilized by the actions of a rival and that through cooperation with rivals, a firm may restabilize its stock price. Thus, this study provides empirical insight about the nature of the interdependent relationship among rivals and the benefits that trade associations and industry self-regulation may provide for participating, and non-participating, firms. © 2007, Palgrave Macmillan Ltd.