Hurricane Katrina's Effect on Oil Companies Stock Prices

By Weiderman, Isaac; Bacon, Frank | Academy of Strategic Management Journal, January 1, 2008 | Go to article overview

Hurricane Katrina's Effect on Oil Companies Stock Prices


Weiderman, Isaac, Bacon, Frank, Academy of Strategic Management Journal


ABSTRACT

This study tests efficient market theory by examining the effect of Hurricane Katrina on oil companies' stock prices. It follows that oil firms with significant investment interests in Katrina's path should incur negative stock price returns in some time frame. This event study analyzed 15 firms with interests in the Gulf of Mexico and examines the effect of Hurricane Katrina on stock price's risk adjusted rate of return before and after August 30, 2005. Results show stock returns dropping significantly prior to Hurricane Katrina reaching land. These results support semi-strong market efficiency, reflecting that the market rapidly anticipated the devastation of Hurricane Katrina. Appropriate statistical tests for significance conducted in this study show that Hurricane Katrina had a significant impact on the risk adjusted rate of return on selected oil company stock prices over the event study period. Specifically, results show that oil company stock price returns started a significant downturn up to 25 days prior to the hurricane event on August 30, 2005.

INTRODUCTION

Natural disasters have a major affect on the stock market. How soon does the stock market respond to an imminent disaster? If the market immediately impounds all available information concerning an approaching weather event, then the stock market may serve as the best possible predictor of the potential devastation of an approaching storm. This study examines the market's ability to monitor or predict the impact of Hurricane Katrina by analyzing the risk adjusted rate of return of selected oil company stocks around the event.

Specifically, this research tests the effect ofHurricane Katrina on the risk adjusted rate of return of selected oil company stocks around the event date defined as August 30, 2005. Hurricane Katrina was one of the biggest hurricanes to hit the Gulf of Mexico in recorded history. Due to the Gulfs oil supply and its ease of transportation, many oil companies have refineries and drilling operations there. With significant asset loss exposure in the Gulf, it follows that this event could damage oil rigs, refineries and storage facilities costing oil companies millions of dollars. Likewise, the probability of such enormous losses should be anticipated by oil company stock price reaction prior to the hurricane event. The purpose of this study is to examine the reaction of the risk adjusted rate of return of selected oil company stocks up to 30 days before and 30 days after the event defined as August 30, 2005. Results here suggest that the market is semi-strong efficient with observed stock price reaction up to 25 days prior to the event.

LITERATURE REVIEW

Some research suggests that the stock market actually increases after a major hurricane as was the case for three major storms, Andrew (1992), Hugo (1989), and Camille (1969). Historically, big hurricanes and other natural disasters reduce short term output while boosting economic growth over the long-term through reconstruction. This balance of positives and negatives tends to reduce the overall economic impact of hurricanes (Barton, 2005).

The Bush administration budgeted $10.5 billion for repair and reconstruction making Hurricane Katrina the costliest natural disaster in U.S. history. This expenditure does not consider opportunity costs resulting from the interruption in the oil supply nationwide and lost grain exports. The overall economic impact on Louisiana and Mississippi was estimated to be over $150 billion.

Hurricane Katrina could not have hit the oil industry at a worse time. With oil prices already on the rise, the effects of Katrina drove prices at the pump over $3 per gallon. This was caused by flooded refineries and damaged drilling rigs. The shut down period of refineries and drilling rigs resulted in a 12% (630 thousand barrels) daily loss in oil production in the U.S. (CBS)

METHODOLOGY

The study sample includes fifteen oil companies which either had operations in the Gulf of Mexico or import oil to refineries in the Gulf. …

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