Freshfields Bruckhaus Deringer LLP Report Suggests Behavioral Crisis Affects the Share Prices Most

According to a recent analysis, the factors that have the biggest short-term negative impact on the stock prices of a company are: corruption, rogue traders, money laundering and tax fraud. This analysis was done to understand how a potential crisis affects a firm and what the board of directors does to make that up. The analysis was conducted by Freshfields Bruckhaus Deringer LLP, a law firm. For the analysis, a total of 78 significant corporate events were analyzed from 16 different stock markets worldwide. These include the New York Stock Exchange and London Stock Exchange.

These behavioral crises generally have huge impact on the market and can create a fall of as much as 50% in the share prices of a company. The report also stated that the executives of the firms which have been affected by behavioral issues should start preparing up-front to see a reduction in the share prices. A double digit decline within 24 hour span, incidentally, is regarded as a significant event for a company registered in any of the stock markets across the world. 

The report even has examples of two recent incidents. The JPMorgan Chase & Co. experienced a huge fall of 24% after disclosure of a multi-billion dollar trading loss at the chief investment office. On the other hand, UBS AG share prices plummeted by 15% on 15th September this year when it announced the loss due to some unauthorized trades done by Kweku Adoboli.

The report also analyzed the effects of events such as environmental disasters and large scale product recalls. According to the report, these factors have little impact on the share prices for the first 48 hours, however, on a long-term basis; these can cause huge trouble to a company.

There are corporate crisis experienced by companies as well and those generally include announcement of a hostile bid or litigation. Such crisis generally affects the very 1st day on its surfacing and the companies recover from these in the fastest manner. Only 1 of every 7 companies suffers from such issues even after 6 months. In general, 15% of the board directors of such companies experiencing share price slump step down within 6 months. In case of unaffected companies, the percentage is only 8.