AUTOMOTIVE RECALLS AND INFORMATIONAL EFFICIENCY

Abstract

ABSTRACT This study provides an empirical test of the informational efficiency of the stock market by exploring the stock price and volume patterns exhibited by Chrysler, Ford, and General Motors around the time of announcement of severe automotive recall campaigns. Because information concerning automotive recalls is released to the public via two distinct methods, which differ only with respect to the number of market participants notified of the recall campaigns, a differential performance analysis of stock returns and trading volume around both events provides evidence of the degree of informational aggregation in the stock market for three closely followed U.S. firms. The results of the study fail to support the definitional notion of informational efficiency with respect to the first public release date of severe recalls, as the vast majority of the stock market's response to recall announcements does not occur until the information is reported to all market participants. Further, tests of differential trading volume around the announcements suggest that some members of the financial community may be trading securities on the basis of the information contained in the first public announcement.

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