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Sudden crash or long torture: The timing of market reactions to operational loss events

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  • Biell, Lis
  • Muller, Aline

Abstract

An emerging literature investigating market responses to operational loss announcements concludes that financial markets tend usually to overreact to loss events. This overreaction is commonly interpreted as reputational damage. We revisit this issue by focusing on the timing of markets’ reactions and highlight two variables: the start and the speed of stock markets’ responses. It appears that when operational losses are caused by internal fraud the negative market reaction materializes earlier and faster. Industry sectors and prevailing market conditions influence the timing of market reactions as well. Our empirical findings reveal moreover that a higher initial grading of the company is associated with a later stock market reaction to the announcement. While the relative magnitude and the length of markets’ overreactions is positively correlated to the concomitant downgrading our study shows that overreaction magnitudes are also strongly correlated to our estimate of the total duration of the reaction.

Suggested Citation

  • Biell, Lis & Muller, Aline, 2013. "Sudden crash or long torture: The timing of market reactions to operational loss events," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2628-2638.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2628-2638
    DOI: 10.1016/j.jbankfin.2013.02.022
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    References listed on IDEAS

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    1. Chernobai, Anna & Yildirim, Yildiray, 2008. "The dynamics of operational loss clustering," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2655-2666, December.
    2. Gillet, Roland & Hübner, Georges & Plunus, Séverine, 2010. "Operational risk and reputation in the financial industry," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 224-235, January.
    3. Cummins, J. David & Lewis, Christopher M. & Wei, Ran, 2006. "The market value impact of operational loss events for US banks and insurers," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2605-2634, October.
    4. Palmrose, Zoe-Vonna & Richardson, Vernon J. & Scholz, Susan, 2004. "Determinants of market reactions to restatement announcements," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 59-89, February.
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    Citations

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    Cited by:

    1. Iñaki Aldasoro & Leonardo Gambacorta & Paolo Giudici & Thomas Leach, 2020. "Operational and cyber risks in the financial sector," BIS Working Papers 840, Bank for International Settlements.
    2. Drienko, Jozef & Sault, Stephen J., 2013. "The intraday impact of company responses to exchange queries," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4810-4819.
    3. Gatzert, Nadine, 2015. "The impact of corporate reputation and reputation damaging events on financial performance: Empirical evidence from the literature," European Management Journal, Elsevier, vol. 33(6), pages 485-499.
    4. Heidinger, Dinah & Gatzert, Nadine, 2018. "Awareness, determinants and value of reputation risk management: Empirical evidence from the banking and insurance industry," Journal of Banking & Finance, Elsevier, vol. 91(C), pages 106-118.
    5. Drienko, Jozef & Sault, Stephen J. & von Reibnitz, Anna H., 2017. "Company responses to exchange queries in real time," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 116-141.
    6. Nadine Gatzert & Dinah Heidinger, 2020. "An Empirical Analysis of Market Reactions to the First Solvency and Financial Condition Reports in the European Insurance Industry," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 407-436, June.
    7. Biell, Lis & Mouchette, Xavier & Muller, Aline, 2020. "When does the market feel it? Magnitude, speed and persistence of market reactions to cross-listings," Finance Research Letters, Elsevier, vol. 34(C).
    8. Cheng, Maoyong & Qu, Yang & Jiang, Chunxia & Zhao, Chenchen, 2022. "Is cloud computing the digital solution to the future of banking?," Journal of Financial Stability, Elsevier, vol. 63(C).
    9. Eckert, Christian & Gatzert, Nadine, 2017. "Modeling operational risk incorporating reputation risk: An integrated analysis for financial firms," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 122-137.
    10. Barakat, Ahmed & Ashby, Simon & Fenn, Paul & Bryce, Cormac, 2019. "Operational risk and reputation in financial institutions: Does media tone make a difference?," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 1-24.
    11. Anna Chernobai & Ali Ozdagli & Jianlin Wang, 2016. "Business complexity and risk management: evidence from operational risk events in U. S. bank holding companies," Working Papers 16-16, Federal Reserve Bank of Boston.
    12. Phin, Andrew & Prono, Todd & Reeves, Jonathan J. & Saxena, Konark, 2022. "Shifts in beta and the TARP announcement," Finance Research Letters, Elsevier, vol. 47(PB).

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    More about this item

    Keywords

    Reputational loss; Banking; Operational loss; Timing; Event study; Market reaction;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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