Operational Risks and Firm Market Performance: Evidence from China*

This study investigates how different operational risks impact firm stock market performance. By using a sample of 762 operational risk events published by 543 listed Chinese firms over the period of 2010-2017, we document an overall significantly negative market reaction to operational risks. Specifically, we find that the stock market reaction differs across operational risk types. Man-made operational risk and disruption operational risk events are associated with greater negative market reaction than nature-caused and nondisruption operational risk events, respectively. We further find that regulatory violations (external risks) have a smaller negative market reaction than operational incidents (internal risks). Finally, we show that different determinants of competitive forces, namely, a firm's market share and product substitutability, have contrasting effects on the market reaction of all operational risks. These findings can aid various stakeholders to understand the impact of different operational risks and advance cost-effective mechanisms aimed at mitigating operational risks in China, with potential application to other regions.