Reputational risk and corporate finance: A multi-event model

21/2015

Reputational risk and corporate finance: A multi-event model

Tuesday 28th April 2015

Arena, M.; Azzone, G.; Secchi, P.; Vantini, S.

This paper develops a model for the evaluation of reputational risk and explores if certain characteristics of negative events happening to a company can explain their reputational impacts. To this aim, the paper adopts the share market value as a synthetic measure of a company’s ability to create economic value and explores the reaction of the share market to the announcement of negative events (e.g. protests, accidents, corporate misconducts). The proposed model contributes to prior research in this field with three innovative dimensions. It applies to events that have a limited impact from an operational perspective (e.g. protests, small environmental events) but could have a considerable reputational effect. It applies to different types of events that can potentially affect the stakeholders’ expectations and perceptions. It addresses the determinants of reputational risk, exploring which characteristics of an event explain the share market reaction. The empirical analysis is based on data collected over a timeframe of ten years, concerning a leading multinational company, that competes in the Oil & Gas industry and is listed on NY Stock Exchange. 67 events involving this company in this period of time are analysed through the proposed model, leading to the identification of a sub-set of events which significant reputational events are associated with and to the exploration of different factors that can explain the relevance of the reported reputational impacts.