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http://ssrn.com/abstract=861364
 
 

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Measuring Reputational Risk: The Market Reaction to Operational Loss Announcements


Jason Perry


affiliation not provided to SSRN

Patrick De Fontnouvelle


Federal Reserve Bank of Boston - Supervision and Regulation

October 30, 2005


Abstract:     
We measure reputational losses by examining a firm's stock price reaction to the announcement of a major operational loss event. If the firm's market value declines by more than the announced loss amount, this is interpreted as a reputational loss. We find that market values fall one-for-one with losses caused by external events, but fall by over twice the loss percentage in cases involving internal fraud. We find that for firms with weak shareholder rights, there is not a significant difference between internal fraud and non-internal fraud events on market returns; however, for firms with strong shareholder rights, while we do not find evidence that the market reacts more than one-to-one for non-internal fraud announcements, we find strong and robust evidence that the market does fall more than one-to-one for internal fraud announcements. These results are consistent with there being a reputational impact for losses due to internal fraud while externally-caused losses have no reputational impact.

Number of Pages in PDF File: 34

Keywords: Reputation, Reputational Risk, Operational Risk, Corporate Governance, Fraud

JEL Classification: G14, G21, G32

working papers series





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Date posted: December 5, 2005  

Suggested Citation

Perry, Jason and de Fontnouvelle, Patrick, Measuring Reputational Risk: The Market Reaction to Operational Loss Announcements (October 30, 2005). Available at SSRN: http://ssrn.com/abstract=861364 or http://dx.doi.org/10.2139/ssrn.861364

Contact Information

Jason Perry (Contact Author)
affiliation not provided to SSRN
Patrick De Fontnouvelle
Federal Reserve Bank of Boston - Supervision and Regulation ( email )
600 Atlantic Avenue
P.O. Box 2076
Boston, MA 02210
United States
617-973-3659 (Phone)
617-973-3219 (Fax)
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