Wednesday, July 24, 2013

Financial Market Response to Aviation Disasters

Following the Asiana 214 crash earlier this month, a number of people have asked how these incidents affect airlines financially. For those interested, Thomas John Walker, Marcus Glen Walker, Dolruedee Thiengtham and Kuntara Pukthuanthong have a forthcoming paper in the International Review of Law and Economics on that very subject, The Role of Aviation Laws and Legal Liability in Aviation Disasters: A Financial Market Perspective (currently available from SSRN here). From the abstract:

Legal liability claims against airlines and airplane manufacturers following an aviation disaster are determined through a myriad of international treaties, intercarrier agreements, and federal and state laws. Which law applies in a specific situation depends on various circumstances surrounding the accident. As a result, pecuniary and non-pecuniary damage awards for the families of the accident victims may vary substantially from case to case. Our study examines how aviation disasters affect the short and long-term performance of U.S. airlines and U.S. airplane manufacturers and explores the factors that drive the performance differences. While prior research has largely focused on brand name effects and rising insurance premiums as possible determinants of stock price losses, our results suggest that the regulatory environment that applies to a given aviation accident has a significant impact on how the market reacts to its announcement. Ceteris paribus, we find that accidents that are governed by state laws which place no limit on damage claims entail particularly large stock price declines. Accidents for which federal laws or international treaties restrict claimable damages, on the other hand, are associated with smaller stock price drops.

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