A first-of-a-kind risk management study suggests that companies still have lessons to learn about minimizing damage from unforeseen events. Risks inherent to a company’s business model were responsible for almost half (49%) of earnings below analyst expectations in a Standard & Poor’s 500 index study of the first three months of 2012.
The key to better managing performance-driven risks and preventing earnings surprises that disappoint investors is being able to link cause and effect. Knowing why earnings fall short of expectations also makes it easier to seize growth opportunities.
The study found the following:
- About 18% of earnings surprises were weather related.
- About 33% of earnings surprises were primarily caused by operational risks such as equipment breakdown or fraud. About 3% of these operational risks were information technology related.
- About 11% of earnings surprises were the result of one-time events such as acquisitions and legal costs.
- Market risks such as hedging errors accounted for 2.5% of earnings surprises.
- Credit risks such as customers failing to repay debts or events related to bank loans made up 3% of the earnings surprises.
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