Spillover effects in the European financial services industry from internal fraud events: Comparing three cases of rogue trader scandals

Abstract

Purpose

Previous research observed that large internal fraud events in the general financial services industry imply negative spillover effects, whereas internal fraud in investment banks can imply significantly positive effects for other banks. This paper aims to shed further light on this contradictory result.

Design/methodology/approach

For this purpose, the authors compare the spillover effects of the three largest cases of rogue trader events in investment banks (Company 1, 1995; Company 2, 2008; Company 3, 2011) on the largest competing non-announcing banks and insurance companies in Europe based on an event study.

Findings

The results show that while the respective announcing firm suffered significant market value losses that even led to bankruptcy in case of Company 1, spillover effects on other banks and insurers were twofold. In particular, in case of Company 2 and Company 3, spillover effects on other financial firms were significantly positive depending on the event window, indicating a dominating competitive effect, whereas the Company 1 event with its resulting bankruptcy led to significantly negative spillover effects and thus contagion.

Originality/value

The results offer a first indication that the severity of the event in terms of its consequences for the announcing firm is crucial, as internal fraud events have the potential to significantly worsen the market values of other financial services firms, which is in contrast to the typically observed positive effects.

Citation

Eckert, C., Gatzert, N. and Pisula, A. (2019), "Spillover effects in the European financial services industry from internal fraud events: Comparing three cases of rogue trader scandals", Journal of Risk Finance, Vol. 20 No. 3, pp. 249-266. https://doi.org/10.1108/JRF-07-2018-0117