Large Losses, Risk Management and Stock Prices

C. Ronald Sprecher · Mars A. Pertl

53 citations0/0 files storedJournal of Risk & Insurance

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Risk Management in Financial Firms Corporate Finance and Governance Insurance and Financial Risk Management

Abstract

Large losses are a major concern of a firm and represent a special problem for its risk manager. The risk manager's function is to minimize the impact of these losses as part of the overall objective of maximizing the wealth of the owners of the firm. This paper evaluates the behavior of the firm's stock price once a large loss occurs and shows that large losses generally have an impact on the market price of the firm's stock.

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1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1970EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]2003The Adjustment of Stock Prices to New Information 1980Financial Theory and Corporate Policy.1972DIVIDEND ANNOUNCEMENTS, SECURITY PERFORMANCE, AND CAPITAL MARKET EFFICIENCY 1978Beta as a Random Coefficient 1972Investor Evaluation of Accounting Information: Some Empirical Evidence

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