Stock Market Reaction to Quality, Safety, and Sustainability Awards in Logistics
| Author | Cuneyt Eroglu,Ahmet C. Kurt,Omar Sherif Elwakil |
| Date | 01 December 2016 |
| DOI | http://doi.org/10.1111/jbl.12145 |
| Published date | 01 December 2016 |
Stock Market Reaction to Quality, Safety, and Sustainability
Awards in Logistics
Cuneyt Eroglu
1
, Ahmet C. Kurt
2
, and Omar Sherif Elwakil
3
1
Northeastern University
2
Suffolk University
3
MIT Center for Transportation & Logistics
Although quality, safety, and sustainability are important concerns in logistics, managers are sometimes reluctant to invest in these areas
because it is not always clear how such investments will benefitfirm performance. Empirical literature provides little guidance in the con-
text of logistics as previous studies report mixed findings across a diverse set of industries, which may not be directly applicable to logistics.
To address this gap, we conducted an event study to estimate the stock market reaction to quality, safety, and sustainability award announce-
ments in logistics. Based on 244 award announcements during the period 2004–13, we found that stock market participants react positively to
announcements of these awards. The market reaction appears to be stronger for sustainability awards than for quality and safety awards. Our
results also suggest that the market reacts more favorably to quality and sustainability award announcements for firms with better past financial
performance and for smaller firms.
Keywords: quality; sustainability; safety; logistics
INTRODUCTION
Quality, safety, and sustainability remain important concerns in
logistics (e.g., Cantor et al. 2011; Richey et al. 2012; Schoenherr
et al. 2014). Although much has been written about these topics,
logistics managers are sometimes hesitant to take quality, safety,
and sustainability initiatives as the business case for these initia-
tives has not been made (Eccles and Serafeim 2013). In other
words, it is not always immediately obvious how and to what
extent such investments reduce a firm’s costs or increase its rev-
enues. While some firms see true financial value in quality,
safety, and sustainability investments, many others make such
investments in order to meet customer requirements or to comply
with government regulations (Lieb and Lieb 2010).
Academic literature has tried to provide guidance to managers
by assessing the economic viability of quality, safety, and sus-
tainability initiatives. In particular, there is a large and growing
number of empirical studies that explore the effects of quality,
safety, and sustainability initiatives on shareholder wealth (e.g.,
Chai et al. 2011; Eccles and Serafeim 2013; Zhang and Xia
2013). Using event study methodology, researchers have investi-
gated the relationship between stock prices and events that signal
investors about a firm’s success or difficulties related to areas
like quality, safety, and sustainability. This study aims to add to
this empirical literature by assessing the impact of quality, safety,
and sustainability award announcements on shareholder wealth in
the context of logistics.
We contribute to the existing literature on the following
accounts: First, we focus exclusively on logistics as the context.
Most of the previous empirical studies have relied on samples
that contained firms from a diverse set of contexts. The results of
these studies tend to be weaker in general (e.g., Cavusoglu et al.
2004). Moreover, these studies usually find that the effect of an
event on a firm’s stock price does vary across industries (e.g.,
Thomsen and McKenzie 2001; Ahmed et al. 2002). It can be
argued that just like the challenges and trade-offs a manager
faces changes from one business function to another, quality,
safety, and sustainability initiatives can have different meanings
in different contexts like finance, marketing, logistics, etc. Find-
ings from one particular context may not necessarily be applica-
ble to another context. Thus, our exclusive focus on logistics
allows us to capture the idiosyncrasies of quality, safety, and sus-
tainability initiatives specific to logistics. As such, our findings
provide a foundation on which future theoretical work can be
built in the logistics literature. Moreover, the results from our
study are more likely to be directly relevant to practicing man-
agers in logistics.
Second, our data set includes three types of awards, namely,
quality, safety, and sustainability awards, unlike previous event
studies that typically focus on a single type of event (e.g., Przas-
nyski and Tai 1999; Balasubramanian et al. 2005). This allows us
to take a comparative perspective. Hence, our results can be useful
for firms trying to allocate resources among competing quality,
safety, and sustainability initiatives. Third, our study considers
events that recur annually. Therefore, a panel data set can be com-
piled so as to control for unobserved heterogeneity and to better
isolate the true effects of these awards. Fourth, we assess the mod-
erating effects of firm characteristics (past financial performance
and firm size). This provides a more nuanced view of the effect of
quality, safety, and sustainability on shareholder wealth. That is,
these initiatives may be more beneficial to certain firms than other s.
Fifth, previous studies in the logistics literature that have
explored the effects of quality, safety, and sustainability initia-
tives on firm performance have used accounting-based or survey-
based measures of firm performance. This approach to measuring
firm performance has been criticized for potential inaccuracy.
Corresponding author:
Cuneyt Eroglu, Supply Chain and Information Management Group,
D’Amore-McKim School of Business, Northeastern University, 360
Huntington Avenue, Boston, MA 02115, USA;
E-mail: c.eroglu@neu.edu
Journal of Business Logistics, 2016, 37(4): 329–345 doi: 10.1111/jbl.12145
© Council of Supply Chain Management Professionals
First, accounting-based measures of firm performance can be
manipulated by managers (Bentson 1984) and therefore may not
provide an accurate measure of firm performance. Second, sur-
vey-based measures can be subject to biases such as the common
method bias (Podsakoff et al. 2003). Event studies, in contrast,
provide a better way of measuring firm performance for two rea-
sons: First, event studies rely on stock prices which cannot be
manipulated by managers (McWilliams and Siegel 1997). Fur-
thermore, the efficient market hypothesis suggests that all rele-
vant information is integrated in the price of a stock within a
short period of time. Thus, stock prices form a more accurate
and objective basis for assessing firm performance. Second,
accounting-based measures are backward-looking as they derived
from historical data, whereas stock market-based measures are
forward-looking as they are based on the expected performance
(Venkatraman and Ramanujam 1986; Johnson and Kaplan 1987;
Schipper 1989). Thus, this study provides a more objective and
appropriate test of the performance effects of quality, safety, and
sustainability initiatives.
The remainder of this paper is organized as follows: First, we
briefly summarize relevant literature and propose hypotheses
about quality, safety, and sustainability awards. Then we present
data collection, calculate cumulative abnormal returns, specify an
econometric model, and test the proposed hypotheses. Finally,
we discuss the results, implications for research and practice,
limitations and future research opportunities.
LITERATURE REVIEW AND HYPOTHESIS
DEVELOPMENT
In this section, we first summarize event studies related to quality
awards, information security breaches, and product recall
announcements. Since these events do not directly correspond to
the events of interest in this study (quality, safety, and sustain-
ability awards), they are not used to motivate our hypotheses.
Instead, the mixed results from these event studies are used to
justify our focus on a specific context, namely, logistics. Next,
we briefly review previous studies on service quality, sustainabil-
ity, and safety in the logistics literature as related to firm perfor-
mance, show how our study contributes to the existing literature,
and propose hypotheses.
A large number of event studies have examined the effects of
quality and security (safety) related events on stock prices in a
diverse set of industries with conflicting results. For example,
event studies report mixed results on the effects of quality
awards which vary with the type of award and geography of the
award-winning firms (Panel A, Table 1). Similarly, event studies
on information security breaches show mixed results depending
on the size of the firm and type of breach (Panel B, Table 1).
Moreover, event studies on product recalls document mixed
results across various industries (Panel C, Table 1). All of these
observations suggest that the effects of an event potentially
depend on the context such as industry and firm characteristics.
When contextual effects are ignored, event studies may yield
insignificant or even misleading results. Thus, we focus our
study on quality, sustainability, and safety awards in logistics.
We further explore the moderating effects of firm characteristics
(previous financial performance and firm size).
Shareholder wealth effects of service quality in logistics
Since the deregulation in the 1980s, competition in the transporta-
tion industry has greatly increased both within each mode (McGin-
nis 1990) and between modes (Buckley and Westbrook 1991). As
a result, service quality has become a critical success factor for all
modes of transportation. For example, Wisner and Lewis (1996,
1997) document how motor carrier industry responded to
increased competition by implementing quality improvement pro-
grams. Similarly, Mazzeo (2003) studies flight delays on routes
with high and low competition and finds that routes with high
competition have shorter flight delays, suggesting that high com-
petition is associated with high quality in air transportation. In an
investigation of quality, service, cost, and speed (time) factors in
the ocean shipping industry, Lagoudis et al. (2006) find that ocean
carriers place the highest priority on quality.
Logistics service quality plays an important role in firm perfor-
mance for firms outside the transportation industry, too. For
example, Innis and La Londe (1994) find that logistics service
quality significantly affects the repurchase intentions of cus-
tomers in the auto glass after market. Daugherty et al. (1998)
show that logistics service performance improves customer satis-
faction, which in turn leads to greater loyalty and higher market
share. Stank et al. (2003) expand the concept of logistics service
performance proposed by Daugherty et al. (1998) into opera-
tional performance, relational performance, and cost performance
and, in the process, replicate their results. More recently, Rao
et al. (2011) develop a logistics service quality measure for
online sales and reconfirm the positive effect of logistics service
quality on customer satisfaction and retention.
The sustained attention on service quality in the logistics liter-
ature attests to the theoretical and practical significance of quality
which is viewed as an important driver of firm performance.
Existing studies have tested the quality-performance link using
accounting-based or survey-based measures of firm performance.
As noted above, this approach to measuring firm performance
can be problematic. As an event study, this present study pro-
vides a more objective and accurate test of the quality-perfor-
mance link in the logistics literature.
To summarize, the logistics literature has pointed out the
growing importance of service quality as a competitive weapon
in an increasingly more competitive environment. Moreover,
previous studies have shown how quality can lead to favorable
outcomes such as improved customer satisfaction and loyalty,
greater market share, and cost performance. Therefore, it is
conceivable that investors view quality awards as an indication
that the award-winning firm will perform well in terms of cus-
tomer satisfaction and market share. Therefore, we hypothesize
that:
H
1
:The stock market reaction for the stocks of firms
receiving quality awards in logistics will be positive.
Shareholder wealth effects of safety (security) in logistics
Supply chain security (safety) is an important concern for firms
across all tiers of a supply chain (Cantor 2008). Chopra and
Sodhi (2004) discuss many types of risk a firm faces across its
330 C. Eroglu et al.
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