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Reputational damage of operational loss on the bond market: Evidence from the financial industry

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  • Plunus, Séverine
  • Gillet, Roland
  • Hübner, Georges

Abstract

We examine bond market reactions to the announcement of operational losses by financial companies. Thanks to the fact the corporate debt is senior to equity, we interpret the cumulated abnormal returns on the bond market of the companies having suffered those losses as a pure reputational impact of operational loss announcements. For a given operational loss, bond returns might be affected at up to three different periods: at the first press release date, when the company recognizes the loss itself and at the settlement date. These impacts hold stronger than for common stocks. We also study the effect of investors' knowledge of the loss amount, and show that the type of operational event and the proportion of the loss in the firm's market value influence the effect of the loss announcement. Cross-sectional analysis indicates that the abnormal return is mostly affected by market-based characteristics for the first press release date, while firm-related characteristics largely affect bond returns upon loss recognition.

Suggested Citation

  • Plunus, Séverine & Gillet, Roland & Hübner, Georges, 2012. "Reputational damage of operational loss on the bond market: Evidence from the financial industry," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 66-73.
    • Handle: RePEc:eee:finana:v:24:y:2012:i:c:p:66-73
    DOI: 10.1016/j.irfa.2012.07.007
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    Cited by:

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    2. Juan Pineiro-Chousa & Marcos Vizcaíno-González & M. Ángeles López-Cabarcos, 2016. "Reputation, Game Theory and Entrepreneurial Sustainability," Sustainability, MDPI, vol. 8(11), pages 1-13, November.
    3. David Adeabah & Charles Andoh & Simplice Asongu & Albert Gemegah, 2023. "Reputational risks in banks: A review of research themes, frameworks, methods, and future research directions," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 321-350, April.
    4. Barakat, Ahmed & Ashby, Simon & Fenn, Paul & Bryce, Cormac, 2019. "Operational risk and reputation in financial institutions: Does media tone make a difference?," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 1-24.
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    6. Laurentiu Tachiciu & Melinda Timea Fulop & Andreea Marin-Pantelescu & Ionica Oncioiu & Dan Ioan Topor, 2020. "Non-Financial Reporting and Reputational Risk in the Romanian Financial Sector," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 22(55), pages 668-668, August.
    7. Ingo Walter, 2016. "Reputational risks and large international banks," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(1), pages 1-17, February.
    8. Ingo Walter, 2013. "The value of reputational capital and risk in banking and finance," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 205-219.
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    10. Ederington, Louis & Guan, Wei & Yang, Lisa (Zongfei), 2015. "Bond market event study methods," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 281-293.

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    More about this item

    Keywords

    Operational risk; Reputational risk; Corporate bonds; Event study;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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