The Anatomy of a Crisis, Volume 2. Why do Markets Overreact to Profit Warnings? FTI Consulting (2019).

An examination of 100 profit warnings in a 12-month period and the effects on company value.

Key Points:

  • In 24 hours after a profit warning, the average lost company value was 3.58 times the expected impact based purely on financial considerations.
  • This is labelled the ‘crisis multiplier’ – this is most pronounced for warnings whereby operational and strategic missteps were at fault.
  • The Crisis Multiplier:
    • Compare the actual profit warning impact as opposed to expected impact, the method is given in the report.
    • Answers to the share reaction after a profit warning are always based on gut instinct, this report can distil this instinct to back it up with empirical evidence.
  • Variance by Industry:
    • This section highlights the difference in share prices after profit warnings across a variety of industries. The financial services industry is seen as the most negatively affected by investor perceptions, beyond just the financials.
  • Variance by Reason Given:
    • This section explores whether market overreactions vary according to the reason management teams gave for warnings.
    • Strategy Issues/Updates and Operational Issues are seen to have a large impact, with Macro/Market and Brexit contributing a lesser impact.
  • Faith or Fundamentals – Investor Poll:
    • This section evidences how investors think when they see profit warnings and how this affects confidence in management teams.
    • Less than half of the 130 investors asked thought companies could manage crises effectively.
  • Recommendations:
    • Optimise IR programmes; Gather a broad range of feedback; Build a relationship with media, and; Fine-tune your crisis preparedness protocols.