Intra-industry effects of negative stock price surprises

We find that a pronounced stock price decline of one firm yields negative valuation effects for industry rivals, on average. We test whether the impact is conditioned on a measure of default likelihood of rivals derived from the option pricing framework. The stock price contagion effects are more pronounced for rivals with the greatest default likelihood. The contagion effects are also conditioned on the degree of the surprise, characteristics of the firm experiencing the negative surprise (such as its relative size), characteristics of the rival firms (such as their similarity to the firm experiencing the negative surprise), and characteristics of the corresponding industry (such as degree of concentration). The sensitivity of industry rivals and portfolios to negative stock price surprises changes during the 2007–2008 financial crisis, which may be because stocks had already been priced to reflect pessimistic outlooks, or because the market anticipated restructuring or government intervention that could prevent the collapse of firms with the greatest default likelihood.