The Impact Of Food Quality Scandals On The Market Value Of Non-incident Corporations In The Same Industry

In recent years, China’s food has been involved in quality scandals more frequently, not only doing much harm to consumers, but causing negative effects on the performance of incident enterprises as well as other non- incident enterprises in the same industry, even seriously damaging international reputation of C hina’s food industry. So the food quality has drawn much public attention from consumers, managers and state leaders. To improve the quality and reputation of C hina’s food, it does matter that managers should know more about the quality scandal, namely about what consequences it can bring, how it affects the enterprise and how to fix the problem. This research uses 54 pieces of food quality scandals as sample events and 296 listed companies from the Shanghai and Shenzhen stock markets of A-share as sample enterprises to study the industry effect of food quality scandal and the way of the effect spreads in based on the event study. Then we explore the main factors accounting for abnormal returns through regression analysis.In the event study, this paper mainly adopts the market model to estimate the expected rate of return, and uses the market-adjusted return model as a comparison to test the robustness of the method. The findings show that the quality scandals have a significant negative impact on the incident enterp rises, resulting in a cumulative abnormal return rate of-3.05% in(1,10); while the non- incident enterprises in the same industry is also significantly affected by the scandal, which is called the contagion effect, with a negative rate of-1.34% in(1,10). According to our study on industry segmentation, quality scandals bring the contagion effect to non- incident enterprises in the same industry in liquor and meat-product industry, while the competition effect happenes in dairy industry and food industry. Furtherly, the paper investigates the propagation paths of the effects, and finds that the effects an event brings gradually spread from the third-level industry to the second and then to the first. Finally, a regression model is built to explore the factors accounting for abnormal returns. Then it is found that the social responsibility of the enterprise does not play the role of protector, that business diversification is helpless to reduce the risk of enterprise; a significant negative correlation is showed between the state-owned nature and the growth of enterprise and cumulative abnormal returns, while a significantly positive one between debt-to-equity-ratio and cumulative abnormal returns; enterprise scale shows no significant correlation with cumulative abnormal returns. Considering above research results, this paper gives the corresponding explanation, and puts forward the corresponding management suggestions to the enterprise managers, market regulators and investors.