Corporate Scandals and the Stock Market

Crooked CEOs and corporate fraud make for explosive headlines and gripping TV dramas. They also can have definite and lasting effects on stock prices and the stock market as a whole, especially following news footage of fat cat executives being hauled away in handcuffs.

What’s more, the fallout from a corporate scandal can fill newscasts and websites for several years, keeping the company’s dirty laundry in the public eye and their stock price on the decline, according to a Stanford University study. That study looked at the impact of thirty-eight damaging CEOs, all at the forefront of scandals (including thirteen cases of outright lying, eight cases of sexual impropriety, and six cases of questionable finances) that took place between 2000 and 2015. Though only about half of the executives eventually stepped down or were fired, all of their companies took stock price hits.

While some corporations are permanently damaged or destroyed by scandal, others rise above the fray and thrive. Whether the story comes from the inner workings of the corporation or from a negative external event, the type of scandal (they’re not all caused by questionable CEO behavior) and the steps the company takes to fix the problem make all the difference.

  • The tainted Tylenol scare of 1982 caused Johnson & Johnson (JNJ) stock to plummet 17% when several deaths were linked to their popular product. By facing the public scrutiny head-on, and dealing with the problem (which, as it turned out, was not caused by anything the company did), the corporation was able to quickly salvage its reputation and watch its stock price rebound in about four months.
  • The Exxon Valdez, an oil tanker, crashed into the Bligh Reef on Alaska’s Prince William Sound on March 28, 1989, spilling millions of gallons of oil. This environmental catastrophe was blamed overwhelmingly on corporate negligence, and analysts expected ExxonMobil’s (XOM) stock to tank. But it didn’t. In fact, even after the corporation was slapped with the biggest fine in history—initially $5 billion in punitive damages—its share price barely dipped by about 4%, and rebounded very quickly. That relatively minor reaction came because the tragic spill happened before Twitter and Instagram, so people weren’t constantly reminded of it. On top of that, the Supreme Court lowered their punitive damages to a 23 measly $507.5 million, a boon to the corporation’s bottom line.
  • E. coli contamination forced the temporary closing of more than forty Chipotle Mexican Grill (CMG) restaurants in 2015, and that drove the company’s stock price down. Through the first months of 2016, the stock price struggled, despite the company’s commitment to safer food-handling practices. Sales dropped while food safety and legal costs increased, leaving the company with overall losses on the books. The company still has some hurdles to overcome, and investors remain wary, keeping the stock price nearly $200 per share lower than it was a year ago, a 27% drop (as of May 2016). Could the share price rebound to prescandal highs? That depends on how well and how fast the company restores consumer confidence.
  • The Volkswagen emissions test scandal of 2015, which affected more than 10 million cars worldwide, led CEO Martin Winterkorn to step down as the corporation’s stock price lost ground. With continuing recalls, an ever-increasing stack of lawsuits, promised payouts to VW owners, fines and penalties, and restrictions on VW diesel-model sales in the United States, it’s no wonder the company is posting billion-dollar losses, or that its July 2016 stock price is down 48% from the same time in the previous year. Volkswagen AG (VOW3) shares, which trade on the German stock exchange, have been seeing volatile, up and down price movement for months. How they handle this scandal will determine which way the shares move next.