Major Hurricanes in the Gulf of Mexico: The Pre-Announcement Stock Market Response

Past research has shown that firm announcements regarding their supply chains are not overlooked by the stock market. The stock market reacts positively to enhancements or negatively to disruptions in firm supply chains. Some have conjectured that the observed market reactions to announced enhancements or disruptions understate the importance of the firm‟s supply chain to the market value of the firm. We show that the market revalues firms once an impending Gulf Coast major hurricane presents a real danger of potentially disrupting the oil and gas supply chain. Major hurricanes posing a greater threat to the oil and gas supply chain lead to larger negative market reactions than those hurricanes that pose little if any threat. We also show that the market‟s reaction is related to not only the eventual location of the major hurricane‟s landfall, which proxies for the threat to the oil and gas supply chain, but also to the variability of oil prices during the period of time the major hurricane strikes. Our results lend even more credence to the importance of the supply chain to the stock market by identifying a setting in which the market reacts before the firm announces a potential or actual supply chain disruption.