What is Headline Risk?
Headline risk is the risk that media coverage of an event will have an adverse effect on a company's stock price.
How Does Headline Risk Work?
Let's say Company XYZ makes a line of sweets and snacks that are sweetened with the 'Sweetums' sugar substitute. The sugar substitute keeps the calorie counts down to just 15 per serving, which is revolutionary.
However, an activist group funds a research study that finds a possible but not proven link between Sweetums and autism. This creates headline risk for Company XYZ. The more media attention the study gets, the fewer people will be inclined to buy the company's products, causing the company to be worth less and the stock price to go down.
Why Does Headline Risk Matter?
Headline risk is one reason companies invest in good public relations people. To mitigate the headline risk for Company XYZ, for example, the company's PR department might point out to journalists that the research did not prove a link, that the research was funded by an activist group, and that the products help people become healthier by helping them lose weight.
For investors, headline risk can make a stock price wobble, but the effects are often short-term in nature. However, it is important to note that headlines can affect a stock price even if the news in those headlines doesn't hold water.