Financial Market Efficiency in a Corporate Crisis:the case of Bridgestone/Firestone

Abstract

The continued interest in the field of Efficient Market Hypothesis has broadened and deepened the understanding of the modern financial mechanism, which have an ever-increasing popularity due to the increased levels of personal investors as well as new forms of institutional investors. The questions still looms as to whether there is any benefit in technical information provided by the vast array of professional advisors. This research tackles the scenario where the compound assumptions of the market model are tested to the limit. This scenario is that of a crisis phenomenon in which the human elements of market formulation reveals its underlying weakness which affects the systems which depend upon it. The research scenario is that of the manufacturing fault on the Ford Explorer tires manufactured by Bridgestone/Firestone. The fault occurred in overseas markets first before reaching critical levels in the American domestic market. The period of denial and withdrawal of information lead to a prolonged drama. The market responded in its own way based on snippets of information to quantify the magnitude of the financial consequences to the firm in the long term well in advance of formal root cause analysis and financial notices. The methodology of the research is to use the Market Model for testing the degree of market efficiency via cumulative excess returns over specified event windows. The data obtained spans a period of two years and thus more than one event window is considered and interpretation of the effects of different release reports are examined. The results of the research revealed that events occurring outside the primary geographical of concern of the investors are not viewed as relevant information and thus the market is unreactive to these occurrences. This means that market efficiency is confined to information sources within First World events primarily until such times that it is viewed that outside events have direct implications in US. The results revealed that the market was at least semi-strong efficient to the events as they reached critical levels within the US and thereafter. The predictive ability of the investor to interpret the value of information was shown to be accurate in most cases. The relevancy of rational behavior between investors was shown to be crucial to market efficiency and that in crisis periods, this assumption experienced relapses.