Investor response to crises 'led by reputation more than numbers'

Investors give far more importance to reputational factors than financial considerations when responding to corporate crises, according to new research from FTI Consulting.

Photo by from Pexels
Photo by from Pexels

The firm looked at 100 corporate crises that resulted in profit warnings over 12 months and their impact on share prices, to examine how investors react.

The average share price fall was 18 per cent across the 100 crises examined. However, the research also found the average value a company lost in 24 hours after a profit warning was 3.58 times the expected impact based on purely financial considerations.

FTI asked 130 investors about their main drivers for responding to a profit warning, and found only 28 per cent pointed to financial reasons.

Other reasons included lack of confidence in leaders (16 per cent), fear of more bad news to come (12 per cent), distrust of company (nine per cent), memory of what usually happens in such situations (nine per cent), and simply "instinct" (10 per cent).

The report, the second in FTI’s Anatomy of a Crisis series, suggests why, as it puts it, "emotional drivers heavily outweigh financial ones".

"The financial information given in a profit warning, even if it includes specific detail about impacts on future periods, is still only really clarifying the picture of ripples caused by events in the past. By their very nature, the events causing the profit warning have already happened. We are where we are, and in prioritising questions like, ‘do we think you can fix it?’ or ‘do we really believe what we’re being told?’ over ‘what has happened?’ or even ‘how bad is it?, investors seem to be telling us that what really matters is not where you’ve come from, but where you’re going next."

"In the final reckoning, we think these questions really all come down to matters of trust, and more specifically, trust in a management team’s ability to get the ‘what next’ part of the story right."

The report points to four main ways to deal with this issue: optimising investor relations programmes, gathering feedback from a range of stakeholders, building relationships with the media, and fine-tuning crisis preparedness products.

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