I happened to reread a passage from James Surowiecki’s “The Wisdom of Crowds in which he discusses the stock market’s reaction to the Challenger disaster, the crucial point being
Did you know that within minutes of the January 28, 1986 space shuttle, Challenger, disaster, investors started dumping the stocks of four major contractors, Rockwell International, Lockheed, Martin Marietta, and Morton Thiokol, who had participated in its launch? Morton Thiokol’s stock was hit hardest of all … the market was right. Six months after the explosion, the Presidential Commission on the Challenger revealed that the O-ring seals on the booster rockets made by Thiokol became less resilient in the cold weather, creating gaps that allowed the gases to leak out.”
It struck me reading this, that I’d heard of Rockwell, Lockheed and MM in many contexts, but I’d never heard of Morton Thiokol. It turns out that they are a specialist builder of booster rockets and similar items (they’re now a division of ATK).
This seems to suggest a prosaic explanation of the market reaction. Whatever the cause, the space shuttle program was going to be shut for a long time. This would do a bit of damage to everyone involved, but much more to the rocket specialist Thiokol than to the other three big diversified companies.
The ATK website indicates that they still have plenty of shuttle contracts, so it seems as if the faulty O-rings didn’t do them much long-term damage over and above the effect on the shuttle program.
I haven’t got the full book or the study cited there, so it may be that this explanation has already been ruled out in some way, but I thought the easiest way to find it was to post and see what response I got.
John Quiggin 
Is he suggesting “the market” knew that it was O-rings or just that it was booster rockets?
Morton Thiokol seems to have made a fairly large variety of missles etc as well as the shuttle booster, put you are right probably not quite as diversified. However, it was probably a pretty good guess even initially that the failure was somewhere in the booster rockets. So the idea that it took 6 months to discover the problem is misleading, as it was most likely booster rockets, even from the outset. Once you know that its probably fair to sell Morton Thiokol more than the other companies.
JQ —
If you’re interested in the reasons for the Challenger disaster, the book by Vaughan is the best account I know. She argues that the cause was systemic, and due to the internal culture at NASA.
@BOOK{vaughan:book96,
author = “D. Vaughan”,
title = “The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA.”,
publisher = “University of Chicago Press”,
year = “1996”,
address = “Chicago, IL, USA”}
Just re-read your post: You say “so it seems as if the faulty O-rings didn’t do them much long-term damage over and above the effect on the shuttle program.”
But the O-rings themselves weren’t faulty. It was the fact that the launch took place in ambient weather conditions outside the normal temperature range of operation of the O-rings which caused them to freeze and then snap, and thus led to the disaster. The fault was not with the O-rings nor with MT, but with NASA management who authorized a launch in these extreme conditions. Indeed, the authorization occured despite warnings from both MT’s and NASA’s mid-level engineers about the danger of doing so, and despite prior related experiences NASA had. The launch had already been delayed, and NASA management were keen for political and PR reasons not to delay it again.