Determinants of Insurers' Reputational Risk
45 Pages Posted: 10 Jan 2013
Date Written: December 15, 2012
Reputational risk has become a critical concern for most organizations. Insurers, who rely on trust to generate business, are particularly vulnerable. Maintaining a positive reputation, however, is costly, leading to the potential for moral hazard in the form of choosing a lowercost strategy that ultimately will underperform relative to consumer expectations. The insurer’s optimal strategy depends on factors affecting the relative costs and benefits of fulfilling consumer expectations, which we test using a rich data set on operational loss risk events. Results indicate that passage of the Sarbanes-Oxley act had a significant effect on firm behavior. We also observe that leverage, firm age, and executive shareholdings are significantly related to reputational risk. In some samples, Tobin’s Q, the level of competition, and the discount rate also were related to instances of reputational loss.
Keywords: reputational risk, moral hazard, operational risk, Sarbanes-Oxley Act
JEL Classification: D81, D82, G22
Suggested Citation: Suggested Citation