One of the more interesting risks you’ll face in investing in stocks (or bonds, or any security of a single company for that matter) is headline risk. Headline risk, as you may know, is the effect that news can have on a company (or sector, etc.). Often times, negative news which is only loosely related to a company can hurt it negatively. Of recent note: Tiger Woods’s “transgressions” on the companies that pay him to sponsor their products.
Tiger Woods vs. … Accenture?
Yes, there is a university study out that tries to isolate the effect of the news and rumors about Tiger Woods (starting around November 27th, when he crashed his car near his house) on the companies that he sponsors. The study even gives us an estimate of the amount of stockholder equity destroyed as a result of Tiger’s transgressions: $5 to $12 billion. Yes, the authors claim that isolating companies that Tiger sponsors shows not random but statistically significant declines in the values of the stock prices of those companies. From the study:
“The “event study” method that we employ measures losses relative to both the stock market as a whole and a set of competitor firms – in other words, relative to all firms that do not use Mr. Woods as an endorser.” -Shareholder Value Destruction following the Tiger Woods Scandal, Christopher R. Knittel and Victor Stango
Is it fair to draw those conclusions? Maybe. Carl Bialik of the Wall Street Journal has weighed in twice on the subject. Even though there are some flaws in the original study (the link is to a revised version), such as incorrect date ranges and incorrect sponsorship claims, Carl suggests trying to find similar events to improve the statistical significance of the study. Kobe Bryant’s scandal in 2003 comes to mind, maybe even the Pete Rose betting allegations and the Tonya Harding/Nancy Kerrigan mess at the Olympics. Of course, even as big as those stories are now, Pete Rose and Tonya Harding likely had less sponsorships than Kobe or Tiger. Maybe it is even more interesting to see which companies drop a sponsor and how that affects their share prices. Electronic Arts, for one, is sticking with Tiger Woods as a sponsor of it’s Tiger Woods golf game franchise.
Headline Risk and You
Now to the juicy part: how does it affect you? Well, if you hold the stock, you can be somewhat certain (even with all the gotchas) your shares will initially be worth less. However, it seems that the market tends to overshoot in either direction when significant news happens. Perhaps Nike will be temporarily harmed by Tiger Woods, but most likely there will be a period of outperformance as investors realize that the stock was oversold. My best example is the Tobacco Master Settlement Agreement of 1998, which put a settlement price for the various government lawsuits against Big Tobacco. For example, investors in Altria would eventually earn their money back after some time in the doghouse:
Flash Player 9 or higher is required to view the chart Click here to download Flash Player nowA perfect comparison? Of course not. And note, for tobacco companies the recovery was a long time coming. As always, my ramblings should be taken with a grain of salt; I’m not a financial adviser, and if you don’t feel comfortable investing on your own, find one elsewhere. What do you think about headline risk?
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News of the day the euro shows resistance to come back:-)