Environmental disasters hurt companies more than illegality

Environmental disasters or product recalls hit companies' values more than the actions of rogue workers or illegal corporate activity, according to a study out today.

Analysis published by the lawyers Freshfields Bruckhaus Deringer shows that while behavioural crises – triggered by companies acting illegally or by rogue employee activity – create lurid headlines that can cause share prices to crash by 50 per cent on the day they become public, the majority of companies have seen their share price value recover within six months.

In contrast, shares suffer very little in the first 48 hours of an operational crisis, such as significant product recalls or environmental disasters. But the subsequent drop in share price can prove lengthy, with more than half of firms that have experienced such a crisis having to wait more than a year to see shares recover to their pre-crisis value.

Chris Pugh, global head of disputes at Freshfields, said: "Directors typically benefit from a window of 24 to 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."