The Great Kanto Earthquake and the Stock Market

An Empirical Analysis on Daily Data of Individual Stocks

Abstract

A massive disaster has an enormous impact on the economy. However, a disaster causing negative impacts on particular firms may positively impact their competitors. Therefore, it would be useful to understand the complicated impact of massive historical disasters on economic and business activities. In this paper, focusing on the TOKYO KABUSHIKI TORIHIKIJO (Tokyo Stock Exchange) during the Great Kanto Earthquake on September 1, 1923, we examine empirically how the earthquake affected corporate management and stock prices. To address this issue, we construct a dataset of daily stock prices of individual firms and conduct a statistical test of whether the earthquake caused structural changes in their stock prices. In addition, we clarify the factors that caused the structural changes in terms of business history.

Our findings are summarized as follows: (1) The changes in stock prices accurately reflected damage caused by the earthquake. We demonstrate that most investors could immediately obtain detailed information on the earthquake’s aftermath through newspapers and economic magazines. (2) Even for a natural disaster with a vast macroeconomic impact like the Great Kanto Earthquake, the impact is heterogeneous among firms. In particular, some firms suffered severe damage from the disaster, while others suffered relatively minor damage. Given the competitive market environment, such differences harmed the former but positively impacted the latter. (3) Such prompt reaction of stock prices suggests that the stock market satisfied the semi-strong form efficiency even in the early 1920s.