Corporate adjustments to catastrophe: a study of investor reaction to Bhopal

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Abstract
This paper investigates the impact of managerial responses on stock market performance after a major industrial accident. In the Bhopal case, the market is largely driven by the accident itself, which severly depresses stock prices. Defensive managerial signals, in which the company denies that problems ex ist, attempts to lay to rest doubts about the firm's future ability to generate revenues and takes action to resume operations, tend to partially counter news of the event and to stabilize stock prices. Investors, on the other hand, react negatively to accommodative signals in which management accepts responsi bility for the accident and attempts to do something to remedy the situation. The tendency of some investors to buy large quantities of Union Carbide stock in anticipation of a takeover seems to be largely responsible for a strong re bound in stock prices that occurs within nine months of the Bhopal accident. This paper, which is on the boundary of strategic management, sociology and finance, is an empirical analysis of the impact of an organizational disaster on one firm's stock price. It also evaluates the company's effort to manage the crisis and points the way to future research.

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