The recent experience of Corrections Corporation of America (CCA), a Nashville-based prison contractor that experienced a July prison escape, demonstrates that markets reward competency and punish failure.

CCA operates the Northeast Ohio Correctional Facility, a medium-security prison in Youngstown intended to house prisoners under contract with the government of the District of Columbia.

On July 25, 1998, six inmates escaped from CCA's Youngstown facility. Five of the six inmates were re-captured, and a series of security enhancements were announced within three weeks of the break out.

Market Holds CCA Accountable

Nevertheless, the incident significantly eroded investor confidence in CCA and related companies. CCA's stock price fell 25% by August 11th from $22.50 per share the day before the breakout to $16.90 per share.

The drop is particularly noteworthy because

  • CCA had announced robust earnings growth 3 days before the breakout.

  • CCA is a large, diverse company, managing 78 facilities in the U. S., the United Kingdom, Australia, and Puerto Rico.

  • CCA has a reputation as one of the best-managed companies in the growing prison privatization market.

  • Medium-security prisoners account for 70% of CCA's total inmate population.

Wall Street Firm Neutral on CCA

The escapes caused PaineWebber, a leading national financial consulting company, to issue a neutral rating on CCA stockrecommending neither a buy or selluntil the fall-out for the prison privatization industry was more fully evident.

Reprinted with permission of the Buckeye Institute for Public Policy Solutions, a free-market research and education organization in Dayton, Ohio.