January 3, 2017, by Academic contributor

Tread carefully when reporting operational losses

How a company’s announcement of its operational losses is reported by the media can affect the market value of the business, with a study showing more negative stories about such losses led to more dramatic declines in value.

The study by researchers at the University of Plymouth Business School and Nottingham University Business School analyzed the tone of media reports using a database of stories from ORIC International, a firm that provides companies with operational risk data.

The study found a 10% increase in negative tone can lead to an additional loss in equity returns of 0.61%, while stories that suggest the threat of litigation can lead to further equity losses of 0.21% for each 10% increase in litigious tone.

The study shows the importance to companies in considering how to report an operational loss, said Caroline Coombe, chief executive of ORIC International. “It is vital that companies have effective and robust operational risk management processes in place so as to prevent loss events,” she said in a statement. If media think a company may be hiding a loss, the tone of the coverage quickly turns negative. “Journalists reward companies that disclose fully and quickly,” said Ms. Coombe. “In instances where this happens, negative reporting decreases rapidly and the overall losses for the firm are reduced.”

Simon Ashby, an associate professor of financial services at the University of Plymouth, said in a statement he was surprised to see negative stories have such a dramatic impact on a company, while Ahmed Barakat, an assistant professor in risk management at the University of Nottingham, said the study showed some ways in which investors may react less negatively to operational losses. Any uncertainty in the reporting of the loss may be viewed positively by investors, who then can assume the final loss may be lower than expected, said Mr. Barakat in a statement. “Furthermore, regulatory announcements concerning reported losses can help to calm the nerves of investors, which can mitigate the effects of negative media reporting,” he said.

This blog was written by Ben DiPietro (an editor and reporter with Risk & Compliance Journal) and was first published in the Wall Street Journal on 21st December 2016

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