24 June 2005

Negative Stock Price Reaction to Announcements of Operational Loss Events...

This article by Cummins, Lewis and Wei has an interesting hypothesis regarding Operational Risk and the Market Values of institutions.

The Market Value Impact of Operational Risk Events for U.S. Banks and Insurers

This paper conducts an event study analysis of the impact of operational risk events on the market values of banks and insurance companies, using the OpVar database. We focus on financial institutions because of the increased market and regulatory scrutiny of operational losses in these industries. The analysis covers all publicly reported banking and insurance operational risk events affecting publicly traded U.S. institutions from 1978-2003 that caused operational losses of at least $10 million - a total of 403 bank events and 89 insurance company events. The results reveal a strong, statistically significant negative stock price reaction to announcements of operational loss events. On average, the market value response is larger for insurers than for banks. Moreover, the market value loss significantly exceeds the amount of the operational loss reported, implying that such losses convey adverse implications about future cash flows. Losses are proportionately larger for institutions with higher Tobin's Q ratios, implying that operational loss events are more costly in market value terms for firms with strong growth prospects.

Here are a few other papers worth exploring on Operational Risk Management:

Implications of Alternative Operational Risk Modeling Techniques

Operational Risk in Financial Service Providers and the Proposed Basel Capital Accord: An Overview

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