Large Losses and Firm Value: Investor Response and Managerial Decisions

This paper examines equity response to the occurrence of large non operating losses. As with previous studies, significant negative abnormal returns are detected around the occurrence of large losses. The paper extends the literature by examining issues not previously investigated. For a subset of losses covered by private insurance, negative equity returns were detected when the losses occurred. However, the negative returns were not significant and quickly reversed. With respect to whether loss estimates were available at the time the losses occurred, significant negative abnormal returns were present regardless of the availability of a loss estimate. The equity response was more severe when loss estimates were not disclosed, and there was a longer period of adjustment and greater wealth losses for shareholders. Equity response to anticipated losses (e.g., awards and settlements) was also examined. Significant negative abnormal returns were observed even though these losses were expected. Further analysis revealed that smaller anticipated losses were associated with temporary negative returns, while larger anticipated losses produced more permanent shareholder wealth reductions. These findings are interpreted in the con- text of information dissemination and managerial decision making.