What is Event Risk?
Event risk is the risk of a negative impact on a company's financial position as a result of an unexpected event like a natural disaster, industrial accident or hostile takeover.
How Does Event Risk Work?
Occasionally companies face events that unexpectedly impact their ability to operate or their ability to make debt payments. A company's vulnerability to unexpected events is its event risk.
Event risk can come from actions of the company itself, like undertaking a restructuring or an acquisition. It can also come from an external corporate action, like a takeover or leveraged buyout (LBO) The event can even be completely independent of the operations of the company, like a natural disaster or a computer virus.
The terrorist attack on September 11, 2001 was a massive external event which disrupted business activities and caused huge shareholder losses in the airline and financial services industries.
Why Does Event Risk Matter?
A company's value depends on many factors that can be anticipated and controlled by management. However, there are unexpected or unanticipated risks from events that may or may not be under management's control. Such events can strongly influence the performance of a company's stock and bonds.
While it is impossible accurately factor all of these risks, it is sound business practice to consider how events may influence the financial performance of a company, its stock and its bonds before investing in that firm.