An illegal action by a rogue employee triggers the biggest one-day crash in the impacted company’s stock price, according to a survey released this week by global law firm Freshfields Bruckhaus Deringer.
The firm examined nearly 80 companies in crisis since the start of the 2008 credit crunch.
News of a rogue employee can cause a stock to sink as much as 50 percent on the day the disclosure became public, according to the survey.
In contrast, an operational crisis (product recall, environmental disaster) has a modest impact during the first 48 hours, but typically results in a bigger stock loss over the long-run.
Chris Pugh, global head of disputes at Freshfields, said in a statement that while no crisis is ever the same, “common threads exist in terms of how emergency responses should be prepared and rolled out and how the markets tend to react.”
A company hit by a rogue executive should typically prepare for an up-front hit on their share prices whereas those dealing with an operational matter are probably going to be in repair mode for the long term. ‘Crises that strike at a business’ core have a greater long-term impact on share price as markets are more likely to lose faith in a management team that cannot resolve a crisis that is intrinsic to its operations,” according to Pugh.
According to FBD, an “informational crises,”, such as customer data losses or theft of commercial secrets, has the least impact on a stock price. Shares of those impacted companies fell no more than three percent on Day 1. None were down more than 30 percent a year later.
FBD also found that 10 percent of the 900 directors of the firms suffering a crisis-related stock price drop left after a year. That percent rose to 15 percent at firms that couldn’t boost the stock price back to pre-crisis levels within six months.