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Scrutiny
  
No Greater Catastrophe...
...Than a few High Profile Individuals Caught in Sex Scandals!
09/06/2011

Economics can sometimes really go beyond conventional concepts. The financial markets that are said to be largely affected by human behaviour have proved the hypothesis yet again. The recent Dominique Strauss-Kahn sex scandal not only occupied prominent slots at late night talk shows, but has found itself being analysed by experts of pink papers and business channels. Not only did the incident apparently damage IMF’s global reputation – or whatever was left of it – and expose the prevalent office culture in the institution, but it also sent ripples across global financial markets.

Post the DSK scandal, oil prices behaved as if someone had pulled the rug from under their feet. Similarly, gold and silver prices also saw a southward trend and even the euro saw a fall in its exchange rate. Gold prices fell by $3 (0.2%) while silver prices fell by 88 cents (2.5%) and platinum prices fell by $9.30 (0.5%). Similarly, the US, Japanese and Chinese stock exchanges also went down by few points. However, this phenomenon of markets suffering from a popular individual’s indiscretions is understandable when the CEO singularly has incredible managerial value. The day after Hewlett-Packard’s CEO Mark Hurd was asked to resign after being caught in an ethics issue, HP’s market value fell by $10 billion in spite of the NASDAQ being up by 20%. Yet, how could the Tiger Woods’ sex scandal shatter the market? A study by two economics professors, Victor Stango and Christopher Knittel, University of California, 2009, concluded that the sex scandal of Tiger Woods reduced shareholder value in his sponsor companies by 2.3% – or a whopping $12 billion.

Undoubtedly, scandals unrelated to companies should not in reality have any link with their stock prices or even with commodity prices; but such scandals strangely do dent investor confidence and corporate stock performance severely. It’s about time that regulators like SEC ensure that akin to their investigations on insider trading, stock movements due to unrelated happenings are also investigated.

By:- Sray Agarwal
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