What Is an Event Risk?

Posted Jun 4, 2022

what is an event risk?-1179385252

Event risk is the risk of a negative effect on a company’s value that results from an unexpected event. The event may threaten its ability to operate or its financial well-being. Events can be internally instigated, like a restructuring, an acquisition, or a product launch. Events can be externally caused, like a computer virus or a natural disaster. The event may affect just the specific organization or may be far-reaching.

Event risks can cause temporary or long-lasting drops in share price and book value in the organizations they affect. For that reason and others, risk management and emergency preparation are core functions that every company should incorporate into operations.


What Are Examples of Risk Events?

 The September 11, 2001, terrorist attacks on the World Trade Center were a colossal risk event for the United States and the global economy. This event is an example of a ubiquitous impact caused by an event. The degree of impact varied according to numerous factors (industry and location being two of the most prominent) but the effect spared few organizations.

Conversely, a risk event might only affect one company. For example, suppose the influential and well-known CEO of a consumer products company is arrested for insider trading (Martha Stewart is one example). The company may struggle to withstand the bad publicity and reputational attacks, but other companies won’t share the impact.

Similarly, a single company may suffer the consequences of an outsider’s action. One famous illustration is the 1982 Tylenol poisoning. The only painkiller targeted with poison was Tylenol, which had several bottles of the extra-strength capsules tainted with cyanide, resulting in seven deaths in the Chicago area. Johnson & Johnson (parent company of Tylenol) has been credited with a model response to the event, pulling the product from all retail outlets and reaching out to the public in an effort to prevent further loss of life. The outcome was that Johnson and Johnson did not lose market share over the long term and was able to recoup the money it spent on recalling the product and communicating with customers.

A Poor Response Can Have a Negative Impact

Remember the Delete Uber hashtag? Rideshare pioneer Uber suffered poor public relations responses when the company seemed unprepared for responses to widely publicized events in 2017 (then-CEO Kalanick was associated with President Trump and also caught on video arguing about compensation with a driver). As a result, the company's reputation suffered, providing a lift to the competition as it sought to gain ground in the battle for riders.

How Can Investors Try to Protect Against Event Risks?

All investments have risks. Investors can seek to manage exposure by conducting due diligence and getting professional guidance. Investors can also manage risk by spreading their investments across industries, sectors, and companies rather than concentrating. Some investors prefer to buy index funds or employ other strategies. Every individual should assess their personal risk appetite and tolerance when selecting components for a portfolio.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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Discover Ways To Help Manage Risk In Your Investment Portfolio

Discover Ways To Help Manage Risk In Your Investment Portfolio

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