Operational and reputational risk in the European banking industry: The market reaction to operational risk events

Journal of Economic Behavior & Organization 85 (2013) 191–206

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Operational and reputational risk in the European banking industry:
The market reaction to operational risk eventsଝ
Philipp Sturm ∗
Department of Banking, University of Tübingen, Mohlstraße 36, 72074 Tübingen, Germany

a r t i c l e

i n f o

Article history:
Received 19 August 2011
Received in revised form 17 February 2012
Accepted 13 April 2012
Available online 21 April 2012
JEL classification:
G14
G21
Keywords:
Banks
Event study
Operational risk
Reputational risk

a b s t r a c t
In this paper I study the stock market reaction to the announcement of operational losses in European financial companies. Accounting for the effect of the nominal loss amount allows for an examination of the reputational damage caused by operational loss events.
The analysis is based on a sample of 136 operational losses stemming from a database of the Association of German Public Sector Banks (Bundesverband öffentlicher Banken, VÖB).
All operational loss events affect European financial institutions with settlements reported by the press between January 2000 and December 2009. In line with previous literature, I find a significant negative stock price reaction to the first press announcement of operational losses. Results show that the stock market also reacts negatively to the settlement announcement as losses are confirmed and the loss amount is known. Even after accounting for the nominal loss amount, cumulative abnormal returns are negative following the date of the initial news article and the settlement date indicating damages to the reputation of the firm suffering the operational loss. Multivariate regression results suggest that reputational damages are rather influenced by firm characteristics than characteristics of the operational loss

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