Operational risk and reputation in the financial industry

Gillet, Roland; Hübner, Georges; Plunus, Séverine

doi:10.1016/j.jbankfin.2009.07.020

Cited by 154 publications

(166 citation statements)

References 20 publications

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“…Perry and de Fontnouvelle (2005) …nd that market value declines one-for-one with operational losses caused by external events, and the fall is even greater in cases involving internal fraud. These …ndings have been con…rmed by Gillet et al (2010). Generally, sooner or later big operational losses make it to the press, so in principle there is no reason to misreport them.…”

Section: Related Literaturementioning

confidence: 87%

On the optimal design of operational risk data consortiums

Kiss¹,

Homolya²

2014

JOP

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To manage operational risk banks increasingly use data coming from data consortia formed by peer institutions. Although existing data consortia seem to work appropriately, it is worth examining why banks report properly (that is, thoroughly and truthfully), since in several countries where new data consortia are planned to be set up, there are fears that banks may choose to report untruthfully or hide information (what we call misreporting). We show that if misreporting cannot be detected, then even in an in…nitely repeated setup the game has multiple equilibria, so proper reporting is not the unique outcome. Then we analyze two types of sanctions. When the punishment is non-monetary (e.g. exclusion from the consortium for a given number of periods), then for some parameter values even the harshest punishment cannot bring about proper reporting as the unique outcome. Nonetheless, a numerical example suggests that by designing adequately the data consortium, proper reporting can be advanced, without overly compromising anonymity. When a monetary …ne is imposed on misreporting banks, then a su¢ ciently sever punishment results in proper reporting, even if anonymity is maintained in the limit.

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Section: Related Literaturementioning

confidence: 87%

On the optimal design of operational risk data consortiums

Kiss¹,

Homolya²

2014

JOP

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“…Our main target is to isolate and measure the reputational risk separately from the market risk in the stock market, once it is proved the oil spill disasters have a negative effect on the firms' reputation. In order to separate strictly reputational effects from the operational losses caused by the oil spills, we follow an approach inspired by Gillet et al; Fiordelisi et al [24,27], who based their study on the loss ratio [22]. In short, we adjust the traditional abnormal returns by factoring in a modified loss ratio, which is defined as the operational loss divided by the firm's initial market value.…”

Section: Methodsmentioning

confidence: 99%

“…Following Dyckman et al [53], we use the market model as the benchmark for estimating the expected or normal returns. Our window comprises 250 trading days after each particular event, as in Gillet et al; Magness; Cannas et al [24,35,54]. Martin Curran and Moran [51] suggest defining the event window in such a way that any leak of information prior to the event is factored in, as well as changes in share prices due to protracted reactions to the public disclosure of the event.…”

Section: Methodsmentioning

confidence: 99%

“…Since the drop in market value suffered by firms is considerably more significant than the economic compensation imposed for the restoration of the ecological damage caused (operational losses), corporate reputational risk can be identified and even quantified separately. For this purpose, we have borrowed several variables from the banking industry: loss ratio [22,28] and reputational abnormal return [24,28], to contribute to the existing literature, this time for non-financial firms.…”

Section: Introductionmentioning

confidence: 99%

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Financial Perceptions on Oil Spill Disasters: Isolating Corporate Reputational Risk

2016

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Abstract:The aim of this paper is to isolate the corporate reputational risk faced by US oil and gas companies-as listed on the New York Stock Exchange (NYSE)-after recent oil spill disasters. For this purpose, we have conducted a standard short-horizon daily event study analysis aimed at the calibration of the financial perceptions caused by these environmental episodes between 2005 and 2011, and the drop effect on the market value of the firms analyzed. We not only find significant negative impact on the stock prices of the companies analyzed but also significant cumulative negative abnormal returns (CAR) around the accidental spillages, especially for the longest event windows. Corporate reputational risk is also identified and even measured by adjusting abnormal returns by a certain loss ratio. A new metric, CAR(Rep), is then proposed to disentangle operational losses and the reputational damage derived from such negative financial perceptions.

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“…For the sample period of 1994-2003, they find that share prices react negatively to announcements of illegal corporate actions. Gillet et al (2010) examine the effect of illegal events that damages reputation on the financial measures by using financial firms from developed European countries and US. They analyse the events occurred between 1990 and 2004.…”

Section: Studies On Other Developed Marketsmentioning

confidence: 99%

Do Stock Prices React to Illegal Corporate Behaviors The Turkish Case

Takmaz

Keleş

2017

isarder

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This paper investigates the influence of illegal corporate behaviour on the stock performance of Turkish listed firms. The sample covers all firms traded in Borsa Istanbul between the years 2007 and 2016. The sample of firms violating laws are collected from Capital Market Board of Turkey weekly bulletins. In total 101 cases of violation are detected for 72 firms. Relevant stock price and benchmark index price data is collected from Thomson Reuters DataStream. For the analysis, event study methodology is used. Event methodology is suitable to examine the impact of an event on the stock price of a firm.Consistent with prior studies in this field originated from US markets and proliferated in other developed markets and emerging markets, the results of this study demonstrate the evidence of a negative effect of the announcement on the stock price of firms that conducted an illegal behaviour. Specifically, we find that risk-adjusted average abnormal returns of firms violating laws are significantly negative on the event day. In addition, for the 11-day event window cumulative average abnormal returns are significantly negative. Two other longer event windows, 21-day and 41-day, display similar results. This confirms that investors in Turkey penalize illegal corporate actions like their counterparts in other countries.

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Operational risk and reputation in the financial industry

Cited by 154 publications

References 20 publications

On the optimal design of operational risk data consortiums

On the optimal design of operational risk data consortiums

Financial Perceptions on Oil Spill Disasters: Isolating Corporate Reputational Risk

Do Stock Prices React to Illegal Corporate Behaviors The Turkish Case

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