A study by the University of Plymouth Business School and Nottingham University Business School has looked at the financial impact of negative media reporting of operational losses suffered by banks and insurers. The research paper reveals how the market value of firms can fall by significantly more than the value of the reported loss.
News articles that adopt a negative tone when reporting on loss events can have a reputational impact which further decreases the share price and increases default risk, the research reveals. In the case of a company’s share price, just a 10 percent increase in negative tone can lead to an additional loss in equity returns of 0.61 percent 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 percent and 0.48 basis points for a 10 percent increase in litigious tone.
While previous research identified a reputational impact associated with publically reported operational losses, this is the first study to look specifically at the impact of negative media reporting in the financial services sector. The 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, one of the world’s largest providers of operational risk data and a not-for-profit consortium for the insurance and asset management sector.
“The high quality database of publically reported operational losses means the results of the study are both reliable and generalizable,” 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.