Scandal-hit firms could perform better in the long run

Corporate scandals have no long-term negative impact on share prices and can even lead to better performance, claims a study of 80 major companies including Apple, Hewlett Packard, IBM, JP Morgan and Yahoo.

The corrective measures put in place after a scandal translate into improved operating performance, the findings showed.

"Corporate scandals can act as a catalyst to implement changes that benefit investors. The companies put in place safeguards to protect against future abuses, and they seem to work," explained economist Surendranath Jory from the University of Sussex in Britain.

Nonetheless, the short-term consequences for shareholders are dire. Chief executives committing fraud or taking part in insider trading end up costing shareholders dearly in the days following the news of the scandals.

However, the negative effects did not last long. Three years on, the share-price performance of the same firms matched those that had not been affected by scandals.

If anything, the 80 companies in the study actually showed an improved operating performance in the years after a scandal.

The researchers looked at the Return on Assets (ROA) score of the companies in the study, as a measure of how efficient the firms were at using their assets to generate earnings.

They found that those who had survived a scandal involving their chief executive officer (CEO) had ROA scored up to 10 per cent better than other rival companies.

The study was published in the journal of Applied Economics.