Industrial incidents causing injury and fatality generate substantial costs to publicly traded firms.
Risks associated with these potential incidents are not limited to only those companies that might
be directly involved. Theoretically, stock markets are designed to self-regulate safety standards
by decreasing company valuations should an incident occur, due to anticipated increased costs.
This paper examines the sectoral consequences of such incidents in the United States, that is, the
spillover effects of an industrial incident on firms operating in similar industrial operations. This
is identified through the transmission of contagion within stock market sectors at the time of such
incidents using a dynamic conditional correlation (DCC) multivariate GARCH methodology. The
results indicate larger incidents, as measured by the number of injuries and fatalities, generate the
largest contagion effects. Also, smaller competitor companies experience the largest contagion as
measured by volatility effects as a result of sectoral chemical incidents, indicating that investors
perceive increased risk factors and/or additional regulatory costs when valuing these companies in
the period thereafter. We hypothesise that the observed reaction originates from expected increases
in future sectoral operating costs through anticipated legislative and/or regulatory changes as well
as uncertainty in the period immediately after an incident.
Keywords: Dynamic correlation, DCC-GARCH, Contagion, Industrial incident, Crisis
management, Stock markets.