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Negative media reports found to ‘dramatically’ exacerbate operational losses
Written by staff reporter
Negative media reports of operational losses suffered by banks and insurers can cause the market value of firms to fall by significantly more than the value of the reported loss, according to a UK university research paper.
News articles that adopt a negative tone when reporting on loss events can have a reputational impact that further decreases the share price and increases default risk, the research suggests. In the case of a company’s share price, just a 10% “increase in negative tone” can lead to an additional loss in equity returns of 0.61% and an increase in Credit Default Swap spreads of 0.43 basis points. In addition, media reports that also mention a threat of litigation can lead to further equity losses of 0.21% and 0.48 basis points for a 10% increase in “litigious tone”.
This is thought to be the first study to look specifically at the impact of negative media reporting in the financial services sector, as part of which researchers from University of Plymouth Business School and Nottingham University Business School analysed the tone of media reports from a database provided by ORIC International.
“The high quality database of publically reported operational losses means the results of the study are both reliable and generalisable,” says Dr Simon Ashby, associate professor of Financial Services, University of Plymouth. “The database contains information on over 19,000 operational loss events, allowing for the selection of a sample that is robust in this area of research.
The report says the financial implications of negative media reporting are significant. In the case of the JP Morgan ‘London Whale’ in which the bank suffered a direct loss of US$6.2bn, the researchers maintain a 10% decrease in the media’s negative and litigious tone surrounding the event could have saved JP Morgan around US$1.27 billion in losses of its market value. This saving would have been more than the total fines handed down to the bank by regulators in relation to the actual event.
CEO of ORIC International, Caroline Coombe, says the study has major implications for how companies contend with operational loss events.“It is vital that companies have effective and robust operational risk management processes in place so as to prevent loss events, however, when an event occurs, the way in which it is communicated dramatically influences the final loss amount,” she says. “If a firm is perceived to be hiding a loss, this quickly generates a negative tone in media reports. Journalists reward companies that disclose fully and quickly. In instances where this happens, negative reporting decreases rapidly and the overall losses for the firm are reduced.”
Researcher, Dr Ahmed Barakat, Assistant Professor in Risk Management at the University of Nottingham, says, “Another finding was that the presence of any uncertainty regarding the loss amount is treated favourably by investors, suggesting that they react optimistically to uncertainty by assuming that the final loss amount may be lower than expected. Furthermore, regulatory announcements concerning reported losses can help to calm the nerves of investors, which can mitigate the effects of negative media reporting.”