The complexity of price discovery in an efficient market: the stock market reaction to theChallenger crash
Michael T. Maloney
*, J. Harold Mulherin
Department of Economics, Clemson University, Clemson, SC 29634, USA
Department of Economics, Claremont McKenna College, Claremont, CA 91711, USA
Received 15 November 2001; received in revised form 8 February 2002; accepted 12 July 2002
We provide evidence on the speed and accuracy of price discovery by studying stock returns andtrading volume surrounding the crash of the space shuttle Challenger. While the event was widelyobserved, it took several months for an esteemed panel to determine which of the mechanicalcomponents failed during the launch. By contrast, in the period immediately following the crash,securities trading in the four main shuttle contractors seemingly singled out the firm that manufactured the faulty component. We show that price discovery occurred without large trading profits and that much of the price discovery occurred during a trading halt of the firm responsible for the faulty component. Finally, although we document what are arguably quick and accuratemovements of the market, we are unable to detect the actual manner in which particular informedtraders induced price discovery.
2002 Elsevier Science B.V. All rights reserved.
G14 information and market efficiency
Price discovery; Stock market; Challenger 0929-1199/02/$ - see front matter
2002 Elsevier Science B.V. All rights reserved.doi:10.1016/S0929-1199(02)00055-X
This paper is an outgrowth of ‘‘Efficient Markets: The Space Shuttle Challenger Story,’’ by Erik Larsen,Master’s Thesis, Clemson University, July 1992, which reported the stock market reaction to the crash based ondaily and monthly returns. We have received helpful comments by a number of individuals and we particularlyacknowledge Bobby McCormick, Clark Nardinelli, and Skip Sauer, as well as the referee and editor.* Corresponding author. Tel.: +1-864-656-3430.
firstname.lastname@example.org (M.T. Maloney), email@example.com(J.H. Mulherin).
Tel.: +1-909-607-3141.www.elsevier.com/locate/econbaseJournal of Corporate Finance 9 (2003) 453–479