All Shocks Are (Not) Created Equal: Intra-Industry Valuation Effects Following Large Stock Price Shocks

Abstract

This paper examines the intra-industry valuation effects following large stock price shocks to companies within the Energy, Financial, and Information Technology sectors from 2010 to 2018. In employing novel methodological choices for classifying industry constituents, identifying large price shocks, and measuring companies’ abnormal returns, I find that the existing literature has underestimated the magnitude of contagion on rivals of firms that experience a large price shock by approximately 50%. Moreover, I introduce the underlying driver of the price shock as a possible determinant of the cross-sectional variation in the rival companies’ responses and find that it provides additional explanatory power even when controlling for some of the other factors already established within this field of research. Importantly, this study bridges together the literature on the intra-industry valuation effects of large price shocks and the literature on the effects of specific corporate actions, such as earnings announcements, and thereby offers new insights that have consequential implications for academics, market participants, and companies.