Journal of Economic Behavior & Organization, Jan, 2013, Vol.85, p.191(16)
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jebo.2012.04.005 Byline: Philipp Sturm Keywords: Banks; Event study; Operational risk; Reputational risk Abstract: In this paper I study the stock market reaction to the announcement of operational losses in European financial companies. Accounting for the effect of the nominal loss amount allows for an examination of the reputational damage caused by operational loss events. The analysis is based on a sample of 136 operational losses stemming from a database of the Association of German Public Sector Banks (Bundesverband offentlicher Banken, VOB). All operational loss events affect European financial institutions with settlements reported by the press between January 2000 and December 2009. In line with previous literature, I find a significant negative stock price reaction to the first press announcement of operational losses. Results show that the stock market also reacts negatively to the settlement announcement as losses are confirmed and the loss amount is known. Even after accounting for the nominal loss amount, cumulative abnormal returns are negative following the date of the initial news article and the settlement date indicating damages to the reputation of the firm suffering the operational loss. Multivariate regression results suggest that reputational damages are rather influenced by firm characteristics than characteristics of the operational loss event: companies with a high ratio of liabilities to total assets suffer more severe damages to reputation from operational losses than companies with more equity. Author Affiliation: Department of Banking, University of Tubingen, Mohlstra[sz]e 36, 72074 Tubingen, Germany Article History: Received 19 August 2011; Revised 17 February 2012; Accepted 13 April 2012 Article Note: (footnote) [star] I would like to thank Werner Neus for his ongoing support and helpful comments. The paper has also benefited from the comments of two anonymous referees, Kartik Anand, Sven Bornemann, Felix Noth, Frederik Hesse, participants of the Conference on Financial Sector Performance & Risk 2011 in Bangor, the VHB Annual Congress 2011 in Kaiserslautern, the International Risk Management Conference 2011 in Amsterdam, the XI. GEABA conference 2010 in Frankfurt, the International PhD Seminar 2010 in Obergurgl, and the Workshop on Banking 2010 in Muenster.
Banking Industry ; Bank Management ; Risk Management ; Stock Markets
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