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Quantifying reputational effects for publicly traded financial institutions

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Abstract

This paper aims to measure reputational effects for financial institutions by examining a firm‟s stock price reaction to the announcement of particular operational loss events such as internal frauds. For this purpose we conduct an event study analysis of the impact of operational loss events on the market values of banks and insurance companies, using the OpVar database (OpData® dataset supplied by OpVantage®). This analysis concerns a number of publicly reported banking and insurance operational risk events affecting publicly traded U.S. or European institutions from 2000 to 2006 that caused operational losses of at least U.S.$20 million – a total of 20 bank and insurance company events. We estimate for these institutions the cumulative abnormal returns and find that stock prices react immediately and negatively to announcements of operational losses due to internal frauds. We conclude our analysis by estimating the „reputational value-at-risk‟ at a given confidence level, which represents the economic capital needed to cover reputational losses over a specified holding period with a specific confidence level.

Suggested Citation

  • Cannas, Giuseppina & Masala, Giovanni & Micocci, Marco, 2009. "Quantifying reputational effects for publicly traded financial institutions," Journal of Financial Transformation, Capco Institute, vol. 27, pages 76-81.
  • Handle: RePEc:ris:jofitr:1388
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    Cited by:

    1. 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.
    2. Nadine Gatzert & Joan T. Schmit & Andreas Kolb, 2016. "Assessing the Risks of Insuring Reputation Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(3), pages 641-679, September.
    3. Jose Manuel Feria-Dominguez & Enrique Jimenez-Rodriguez & Ines Merino Fernandez-Galiano, 2013. "Isolating the corporate reputational risk in environmental oil spill disasters," Working Papers 13.02, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    4. Sturm, Philipp, 2013. "Operational and reputational risk in the European banking industry: The market reaction to operational risk events," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 191-206.
    5. José M. Feria-Domínguez & Enrique Jiménez-Rodríguez & Inés Merino Fdez-Galiano, 2016. "Financial Perceptions on Oil Spill Disasters: Isolating Corporate Reputational Risk," Sustainability, MDPI, Open Access Journal, vol. 8(11), pages 1-15, November.

    More about this item

    Keywords

    Reputational risk; financial institutions;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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