The effect of the Rana Plaza disaster on shareholder wealth of retailers: Implications for sourcing strategies and supply chain governance⋆

• Published date: 01 March 2017
• Date: 01 March 2017
• Author: Brian W. Jacobs,Vinod R. Singhal
• DOI: http://doi.org/10.1016/j.jom.2017.01.002

The effect of the Rana Plaza disaster on shareholder wealth of

retailers: Implications for sourcing strategies and supply chain

governance

*

Brian W. Jacobs

a

, Vinod R. Singhal

b

,

*

a

Eli Broad College of Business, Michigan State University, East Lansing, MI 48824, United States

b

Scheller College of Business, Georgia Institute of Technology,Atlanta, GA 30308, United States

article info

Article history:

Accepted 14 December 2016

Available online 1 February 2017

Keywords:

Responsible sourcing

Supply chain governance

Corporate reputation

Stock market reaction

Industrial accidents

abstract

Supply chain and reputational risks are often assumed to motivate firms to source production in

developed, high-cost countries rather than developing, low-cost countries. To examine this assumption,

we provide evidence from the collapse of the Rana Plaza building on April 24, 2013, which with its 1133

fatalities and 2438 injuries is seen as one of the worst industrial accidents in history. Do markets reactive

negatively enough to such events to motivate firms to shift their sourcing strategy? We analyze the stock

market reaction to the Rana Plaza disaster in the Bangladeshi ready-made garment industry to address

this question. Our analysis is based on a sample of 39 publicly traded global apparel retailers with sig-

nificant garment sourcing in Bangladesh. Stock market reaction to retailers on the day of the Rana Plaza

disaster is negative, but its magnitude and significance dissipate by the following day. We find no evi-

dence of significant stock market reaction during the 11 trading days (approximately two weeks in

calendar time) following the disaster. Retailers responded to the disaster by developing two different

agreements to improve factory and worker safety in Bangladesh ethe Accord on Fire and Building Safet y

in Bangladesh (AFBSB), and the Alliance for Bangladesh Worker Safety (ABWS). We find no evidence of

significant stock market reaction to the announcements of the AFBSB and the ABWS. The insignificant

negative economic impact from the Rana Plaza disaster suggests that retailers have little economic

incentive to move sourcing out of Bangladesh or other low-cost countries so as to reduce therisk of being

involved in such events. We discuss the implications of our results for retailers, non-governmental or-

ganizations (NGOs), garment factory owners in Bangladesh, the Bangladeshi government, and academic

researchers.

©2017 Elsevier B.V. All rights reserved.

1. Introduction

At approximately 9:00 a.m. local time on Wednesday, April 24,

2013, Rana Plaza, an eight-story commercial building in Savar,

Bangladesh, collapsed. The building housed several garment fac-

tories employing approximately 5000 workers. Due to the nature of

the disaster site and the caution required to not further injure

survivors, recovery efforts took several days; the final survivor was

not rescued until May 10, 16 days after the building collapse.

Despite immediate local and international rescue response, there

were 1133 fatalities and 2438 injuries (CPD, 2013). Although

garment factories in Bangladesh and other developing countries

had previously experienced industrial accidents, the Rana Plaza

disaster is one of the worst industrial accidents in history (Hobson,

2013).The scale of this unspeakable tragedy increased awareness of

the risks and costs of sourcing from low-cost countries, as well as

the need to improve supply chain governance mechanisms for

working conditions and safety in the global garment industry.

A commonly held assumption is that, for firms sourcing in

developing countries like Bangladesh, incidents like the Rana Plaza

disaster cause enough financial and reputational damage to moti-

vate firms to either: 1) move production to more developed, high-

cost countries with a higher level of worker protection; or 2)

actively engage in improving working conditions in the developing,

low-cost country. Further, the media and risk exposure resulting

*

Accepted by: Mikko Ketokivi.

*Corresponding author.

E-mail addresses: jacobsb@broad.msu.edu (B.W.Jacobs), vinod.singhal@scheller.

gatech.edu (V.R. Singhal).

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

http://dx.doi.org/10.1016/j.jom.2017.01.002

0272-6963/©2017Elsevier B.V. All rights reserved.

Journal of Operations Management 49-51 (2017)52e66