Impact of negative media reports mapped in new study
- Published: Tuesday, 14 February 2017 08:17
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.
The financial implications of negative media reporting are significant. In the case of the JP Morgan ‘London Whale’ in which the bank suffered a direct loss of US$6.2bn, a 10 percent decrease in the media’s negative and litigious tone surrounding the event could have saved JP Morgan around US$1.27 billion in losses of its market value. This saving would have been more than the total fines handed down to the bank by regulators in relation to the actual event.
The study has major implications for how companies contend with operational loss events, says Caroline Coombe, CEO of ORIC International. “It is vital that companies have effective and robust operational risk management processes in place so as to prevent loss events, however, when an event occurs, the way in which it is communicated dramatically influences the final loss amount.
“If a firm is perceived to be hiding a loss, this quickly generates a negative tone in media reports. Journalists reward companies that disclose fully and quickly. In instances where this happens, negative reporting decreases rapidly and the overall losses for the firm are reduced.”
Dr Ashby says he was surprised at the level of impact media reporting has. “The effect on both the share price and the credit default swap spreads of banks and insurance companies caused by negative reporting is significant.”
Fellow researcher, Dr Ahmed Barakat, Assistant Professor in Risk Management at the University of Nottingham, says, “Another finding was that the presence of any uncertainty regarding the loss amount is treated favourably by investors, suggesting that they react optimistically to uncertainty by assuming that the final loss amount may be lower than expected. Furthermore, regulatory announcements concerning reported losses can help to calm the nerves of investors, which can mitigate the effects of negative media reporting.”One of the traditional challenges faced by insurers has been the ability to obtain an industry-wide view when building their operational risk processes, says Caroline Coombe. “We are working to provide benchmarking and measurement capabilities across the sector, and working with academic researchers who want to advance the thinking in our field is just one of the ways we are doing this.”