How do operational losses affect the stock prices of energy firms?

Findings

• The researchers constructed a unique sample of 452 international operational loss events announced from 1996 to 2021 spanning seven risk categories. 
• The cumulative average abnormal returns (CAAR) were negative within a 5-day period around the announcement of operational losses.
• Looking at the effects in different regions, negative returns were observed for operational losses announced in Asia, Europe, Canada and South America, but in Africa, Australia and the United Kingdom the excess returns were insignificant. The observed differences may be due to differences in market expectations. 
• The researchers observed that firms in the US reported operational losses smaller in magnitude than those in other regions, suggesting that US firms may have more robust risk management processes and/or better access to insurance markets, which may allow them to better mitigate the negative impact of operational losses.
• Large relative losses produce negative and significant excess returns, whereas small relative losses have no impact on the stock prices of announcing firms, possibly because small losses seem to be considered as part of the business by investors, who have probably already priced in those risks.   
• Regarding industry groups, they observed negative and significant abnormal returns for the Electric and Gas industry group, but they are insignificant for the Oil and Gas companies.
• Analysis based on risk category shows that only the business disruption and system failures, the client, products and business practices, and the damage to physical assets categories produce negative and significant excess returns.