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Scandals don't impact businesses negatively in long-term

ANI  |  Washington 

a new research has claimed that scandals don't really impact businesses in long-term, and can in fact lead to better performance.

The study by University of Sussex says that after corrective measures are put in place following a scandal translate, it improves operating performance, often outstripping that of scandal-free rivals.

In a study of 80 corporate scandals in the USA, share prices plummeted between 6.5 percent and 9.5 percent in the month after the misconduct was made public, collectively costing shareholders an average of 1.9 billion dollars per scandal-hit firm.

And it is not just limited to financial misdemeanours - personal scandals such as having an affair, lies on resumes and harassment cases had just as much impact.

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 - including Apple, Hewlett Packard, IBM, JP Morgan and Yahoo - actually showed an improved operating performance in the years after a scandal.

Lead researcher and economist Dr Surendranath Jory, said that corporate scandals could act as a catalyst to implement changes that benefit investors. The companies put in place safeguards to protect against future abuses, and they seemed to work.

He added that he thought that noise of corporate misdeeds would have leaked prior to official announcements and that investors would have already priced in the negative consequences of those crimes days before the announcements. But it seems that investors waited for something more tangible before reacting - for instance, an announcement in the media.

Dr Jory, alongside colleagues at East Carolina University and the University of Texas-Pan American in the USA, examined corporate scandals between 1993 and 2011 that were expressly linked to a firm's CEO.

The study is published in the journal of Applied Economics.

First Published: Sat, February 07 2015. 13:19 IST