The Impact Of Negative News Related To Product Quality On Stock Prices

The7-23Train Accident of Wenzhou, which caused about200people’s death,also caused huge price decrease to the related listed companies’ stocks. After thataccident, the companies related to the construction and maintenance of CRH (ChinaRailway High-speed) trains have all experienced huge decrease in their stock prices,several of them have even touched the lower limit. Such evidence clearly shows thatnegative news related to product quality does have its own impact on the equitymarket. However, this topic is quite new to the academic world; few people have everfocused on this kind of news’ impact on stock prices before, especially in China.This thesis summarizes166pieces of product quality related news during May2011to February2012and conducts a30-day event window to test the relationshipbetween negative quality news and its corresponding stock price change. The thesisuses hypothesis test to check whether there is a significant relationship between theabove two; the thesis also applies regression model to further prove such causalrelationship between negative quality news and stock price decrease.The result shows that once the negative product quality related news comes out,there will be a significant stock price decrease of about-0.6%daily which will lastabout four days and for cumulative abnormal return it will be significantly negative ofabout total-1.7%for about14trading days. In addition, the more search volume andthe more media coverage is, the more decrease in the stock price. The above twofindings suggest there is a causal relationship between news of product quality andstock prices.This thesis also finds that the impact of negative product related news has astrong relationship with both search volume and the diversity of related company’sproduct line. More search volume and more single the product line, the impact ofnegative product quality related news will be bigger.