Former CEOs of Tyco International
Court sketch of former chef executive of Tyco International Dennis Kozlowski (C) and former chief financial officer Mark Swartz (2nd L) being convicted for grand theft larceny, securities fraud, and other charges in New York on September 19, 2005. New York state's top court has agreed to hear appeals by Kozlowski and Swartz, a court official said. REUTERS/SKETCH BY ANDREA SHEPAR

Financial and personal scandals associated with chief executives may cause big commercials organisations terrible consequences. However, these do not have lasting negative effects on future business dealings, according to a recent study. The researchers say that once corrective actions are carried out, disreputable situations can instead provide added learning that boosts the firm’s performance and competence. This research, led by Dr Surendranath Jory of the University of Sussex, was published in the journal of Applied Economics.

An analysis of 80 business scandals in the United States from 1993 to 2011 revealed a sudden decrease in stock prices from 6.5 percent to 9.5 percent four weeks after a misdemeanour hit the headlines. These cost all shareholders of each affected firm an average of $1.9 billion.

Fraudulent transactions, participation in an insider trading, involvement in illicit affairs or cases of harassment are some of the outrageous actions committed by chief executives. Immediate impacts were awful the moment investors knew about the scandal. However, once remedial measures were executed after a disreputable event, the firms’ share-price performance did better three years thereafter. Some even outshined rival companies that were not involved in any corporate scandal.

The research team referred to the Return on Assets (ROA) score of the firms included in this study. The companies that were able to recover from a corporate scandal performed better than their competitors by 10 percent. An ROA score indicates how management of a firm ensures profitability of its assets.

Jory said that corporate scandals can catalyse changes to the advantage of investors. The implementation of preventive actions protects companies from such damaging acts in the future. Surprisingly, investors also do not react adversely at once even if information about the scandal has been disclosed unofficially. They tend to wait for a public announcement by the firm concerned. Some hold on to their shares despite fall in share prices.

Anyway, matters get better with improved management. Large companies analysed in this research include Yahoo, Apple, Hewlett Packard, IBM and JP Morgan. This study on market reaction to corporate scandals is co-authored by associates at East Carolina University and the University of Texas-Pan American.

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