Measuring Reputational Risk: The Market Reaction to
Operational Loss Announcements

Submitted on 29th July 2015

We measure reputational losses by examining a firms stock price reaction to the announcement of a major operational loss event. If the firms 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 onetoone 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.

Source
Federal Reserve Bank of Boston
Length of Resource
34
Resource File
Author
Jason Perry, Patrick de Fontnouvelle
Date Published
Publication Type
paper
Resource Type
academic