GLOBAL – Behavioural crises triggered by companies acting illegally or questionably or by rogue employee activity spook investors the most and can cause shares to crash by 50% or more on the day they become public.
In contrast, operational crises impairing a company's ability to function, such as significant product recalls or environmental disasters, have a modest impact in the first 48 hours of a crisis breaking, but typically cause the greatest long-term effect on shares, down almost 15% after six months, according to a study by international law firm Freshfields Bruckhaus Deringer on the effects of major reputational crises on large, internationally listed businesses.
One-quarter of companies were still down on pre-crisis levels after a year.
Behavioural crises are the only type of crisis where companies come close to regaining pre-crisis valuations after six months – they were down just 2%.
Of the 78 global reputational crises analysed, less than half, 48%, of affected companies saw share prices fall on day one.
It rose to 54% after two days.
A month on, the findings show a peak in negative sentiment, with six out of 10 companies affected.
A year later, 53% had not seen share prices regain pre-crisis levels.
Chris Pugh, global head of disputes at Freshfields, said: "Our research shows that directors typically benefit from a window of 24-48 hours, during which financial market reaction to news of a major reputational crisis will be relatively restrained.
"It's often their last chance to take quick and decisive action before financial news bulletins take centre stage.
"The speed at which a company's executives are dragged to face the court of public and financial markets' opinion largely depends on the type of crisis they are tackling.
"Executives at firms affected by a behavioural issue 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."
In other news, the UK water industry is facing a reduced level of revenue predictability, as the difficulty of calculating the future cost of capital has led to concerns regarding asset-based valuation methodologies.
Levels of merger and acquisition activity – which has attracted substantial investor interest in recent years – may also drop following proposals by the UK Water Services Regulation Authority Ofwat.
Modifications to companies' wholesale licenses were proposed by Ofwat in October and clarified by a further paper in November, which stated that 51% of sector revenue would remain under the current remuneration methodology, and close to 40% of non-network activities would be opened up to wholesale competition from 1 April 2015.
Given the lack of detail in the Ofwat proposals, it is still far from certain how utilities and potential new entrants will be remunerated in the next price review, the 2015 to 2020 regulatory period.
This has led 11 of the 23 regulated water companies to challenge Ofwat's proposals as they stand, with a Competition Commission referral by year-end the most likely next step.
Lastly, Swiss insurer Swiss Re has estimated its claims burden from Hurricane Sandy to be around $900m (€691mn), net of retrocession and before tax.
Total insured losses are estimated to be $20bn-25bn.
Matthias Weber, group chief underwriting officer at Swiss Re, said: "The hurricane hit the densely populated northeast coast of the US. This led to prolonged power outages, disruption to public transport and damage to other infrastructure, which has made recovery efforts very difficult.
"It also complicates the loss-assessment process. Our claims estimate, therefore, is subject to a higher than usual degree of uncertainty and may need to be subsequently adjusted."