The Performance of Water Service Industry Stock Prices and Sensitivity to Highly Publicized Contract Failures

Abstract

The water service industry has aggressively pursued contracts for the management or ownership of urban water utilities around the world. The industry has performed very well in terms of stock prices of publicly traded firms in comparison with the well-known stock price averages. However, there have been some widely publicized contract failures, the most dramatic being the cases of Cochabamba, Bolivia (2000) and Atlanta, Georgia, USA (2003). Such failures could discourage investment in the industry by depressing stock prices. A stock price index for a set of prominent firms is constructed that shows the highly favorable long term trend of WSI prices relative to the standard indexes. Then by using more formal “event analysis”, the study finds that there were no significant negative effects of the unfavorable events on the stock prices of the WSI sample. The formal announcements of these prominent contract cancellations apparently contained no surprises and little new information of industry-wide relevance because the industry was aware of the developing situations. Large firms in this risky industry build the expectation of occasional (even spectacular) failures into their company-wide plans.

Keywords:

• water service industry
• stock prices
• contract failures
• financial damage