Thepaper presents a heroic theme of disaster recovery for the BP Companyafter the explosion of the Deepwater Horizon drilling rig in Mexico.The company’s recovery is unique compared to other organizations,such as the Enron financial crisis in 2001, Lehman Brothers in 2008and the Bhopal India chemical plant catastrophe in 1984, which eitherended up in bankruptcy or mergers (Fodor & Stowe, 2012).
First,investors’ beliefs and asymmetry of information determinedequity-trading volumes. The overconfidence of investors played a rolein the survival of the BP Company during the predicament. Overconfidence was clearly depicted by the constant increase in theprices of the shares despite having information about the oilexplosion (Fodor & Stowe, 2012).
Secondly,market intelligence determined the performance of financial markets.At first, the lack of disaster information contributed to theinvestors’ bullish position on the company’s stocks as indicatedby the low volatility in the ADR and options after the catastrophe(Fodor & Stowe, 2012).
Thirdly,devastating information about a crisis destroys investors’confidence. Entrepreneurs anticipated a dividend cut after the WallStreet Journalannounced the possibility of the company to suspend its dividendsafter the event. Besides, prices fell after the announcement thatthe oil spill was expected to reach the Louisiana coast within aweek. In contrast, the ADR prices increased on July 15 afterinvestors obtained information that the damaged oil well had beencapped, and the seepage had been stopped (Fodor & Stowe, 2012).
Fourth,various financial markets involve different rates of informationflow. The options market provided accurate information since theyconsidered the cash flows until the time of expiration. In contrast,the stock markets were unable to provide clear signals about pricechanges or dividend cuts as they considered an indefinite stream ofcash flows (Fodor & Stowe, 2012).
Finally,contract agreements within a financial market determine the extent ofreaction to a crisis. The options markets were the first toexperience significant changes in prices because they were determinedon a day-to-day basis. The prices of equity and bond marketsdepreciated later, and in the same order respectively. Specifically,from 19th – 29th April, ADR prices recorded a decline of more than 11%. In contrast, the certificate of deposits only decreased by lessthan 1% (Fodor & Stowe, 2012).
Fodor,A. & Stowe, J. (2012). Financial market reactions to a companydisaster: The BP Case. Journalof applied finance, 22(1)1-16