Investigating the significance of reputational risk In banks' financial performance
| dc.contributor.advisor | Mukuddem-Petersen, Janine | |
| dc.contributor.author | Zinzindohoue, Senan Joseph Fitzgerald | |
| dc.date.accessioned | 2025-10-02T07:13:20Z | |
| dc.date.available | 2025-10-02T07:13:20Z | |
| dc.date.issued | 2025 | |
| dc.date.updated | 2025-10-02T07:10:57Z | |
| dc.description.abstract | The field of organizational studies, particularly in the financial sector, has increasingly acknowledged the importance of effective risk management. This consensus is pivotal for the stability and health of the global financial system and is supported by studies showing the positive impact of managing key risks like credit, market, operational, and liquidity on a bank's overall performance. Despite these advancements, gaps remain, especially concerning nonfinancial risks like reputational risk. Reputational risk in banking is complex, with current research offering fragmented insights, particularly regarding its impact on financial outcomes. Many studies have focused on short- term market reactions, neglecting the long-term financial impact on banks, and often overlooking key financial metrics like Return on Assets (RoA) (Cummins et al., 2006; Eckert & Gatzert, 2017; Fiordelisi et al., 2013; Gillet et al., 2010; Perry & de Fontnouvelle, 2005). Heidinger & Gatzert (2018) and Gillet et al. (2010) contributed significantly to understanding the dynamics between reputational risk and RoA, but their research did not explore the direct impact of reputational events on RoA, leaving a crucial aspect unexplored. Furthermore, there's a notable lack of research directly linking the severe reputational damage stemming from operational risks, and especially internal frauds to a bank's financial well-being, specifically in terms of deviations in returns (mainly RoA). Also, most reputational research is confined to U.S. and European regions, lacking a global perspective. The aim of the research was to address these shortcomings by examining the diverse effects of reputational risk resulting from internal fraud on the financial performance of banks, with a particular emphasis on deviations in RoA. The study employed a comprehensive theoretical framework combining the Resource-Based Theory (RBT) and the Unified Theory of Reaction in Assets Market to analyze the dynamics of reputational risk in banking. In order to align with the aforementioned theoretical foundations, the study employs a positivist research paradigm, emphasizing empirical evidence and logical reasoning for the objective validation and generalization of the relationship between reputational risk and the financial performance of banks. The utilization of quantitative methodologies within this paradigm guarantees the requisite methodological rigor and objectivity for a comprehensive and detailed examination. By leveraging reputable data sources like the Global Operational Loss Database (GOLD) by Riskbusiness (UK) for operational loss details, the Bloomberg databases for essential financial metrics, and the World Bank databases for critical macroeconomic indicators, the study ensures it is built upon a foundation of accurate, reliable, and globally recognized data points. Consistent with previous studies, the research used a longitudinal dataset spanning ten years,focusing on commercial and retail banks with operational losses exceeding USD 100,000. The comprehensive and systematic process of identifying operational losses resulted in the selection of 61 instances of internal fraud. These losses are distributed across 18 different currencies, implicating 53 banks situated in 23 countries and 10 distinct geographical regions globally. Considering that the ultimate goal of managing reputational risk, much like the broader risk management framework within a bank, is to continually minimize its influence on pivotal financial indicators like RoA (Coskun et al., 2019; Wanjohi et al., 2017), this research considered adjusting the traditional "event study" methodology and the "market reaction" paradigm commonly employed in reputational research (Cummins et al., 2006b; Eckert & Gatzert, 2017; Fiordelisi et al., 2013b; Gillet et al., 2010b). Instead of focusing on market reactions within an "event window," the study used a panel longitudinal analysis. The estimation of reputational loss was based on the analysis of trends in RoA for a period of three years prior to and following each operational loss event. This was conducted using the Generalized Least Square (GLS) Random Effects model. The rigorous application of multicollinearity, heteroskedasticity, and autocorrelation tests ensures the validity of the random effects model employed. Additionally, the study utilized the Boehmer et al. (1991) test statistic Z, originally developed to detect event-induced volatility in stock returns, to assess the statistical significance of the mean abnormal returns (AR) associated with reputational loss. The collective results of these tests provide substantial evidence that the findings derived from the model are robust and reinforce the credibility of the conclusions drawn from the analysis. The study's findings revealed a substantial negative impact of internal fraud disclosures on banks' RoA, with an average reputational loss of around $54 million. The finding challenges the RBT, which suggests that larger banks (tangible and intangible assets) are better equipped to mitigate reputational crises. Instead, the study found a high positive correlation between the size of the bank and the intensity of the operational loss. Moreover, the research highlighted the importance of a global perspective, revealing significant regional variations in the impact of reputational losses. The study's conclusions contribute significantly to the understanding of reputational risk in the banking sector, offering both theoretical and practical insights. The rejection of the null hypothesis (H01) for banks with at least one negative AR post-event confirmed the critical impact of reputational events on financial outcomes. The study also challenged the assumption that the size of operational losses predicts the extent of reputational damage. Smaller banks were found to be more susceptible to reputational damage, supporting the alternative hypothesis (H3). Additionally, significant regional variations in the impact of reputational losses were confirmed, emphasizing the need for region-specific risk management strategies. This research not only advances academic discourse but also has substantial implications for real-world banking practices. It contributes to a deeper understanding of reputational risk dynamics, challenging existing theories, and offers banks crucial insights for tailoring their risk management strategies based on size and regional factors. Future research should focus on expanding the sample size for a more comprehensive analysis and investigate the integration of a capital charge for reputational risk in banking regulations. | |
| dc.identifier.apacitation | Zinzindohoue, S. J. F. (2025). <i>Investigating the significance of reputational risk In banks' financial performance</i>. (). University of Cape Town ,Faculty of Commerce ,Graduate School of Business (GSB). Retrieved from http://hdl.handle.net/11427/41963 | en_ZA |
| dc.identifier.chicagocitation | Zinzindohoue, Senan Joseph Fitzgerald. <i>"Investigating the significance of reputational risk In banks' financial performance."</i> ., University of Cape Town ,Faculty of Commerce ,Graduate School of Business (GSB), 2025. http://hdl.handle.net/11427/41963 | en_ZA |
| dc.identifier.citation | Zinzindohoue, S.J.F. 2025. Investigating the significance of reputational risk In banks' financial performance. . University of Cape Town ,Faculty of Commerce ,Graduate School of Business (GSB). http://hdl.handle.net/11427/41963 | en_ZA |
| dc.identifier.ris | TY - Thesis / Dissertation AU - Zinzindohoue, Senan Joseph Fitzgerald AB - The field of organizational studies, particularly in the financial sector, has increasingly acknowledged the importance of effective risk management. This consensus is pivotal for the stability and health of the global financial system and is supported by studies showing the positive impact of managing key risks like credit, market, operational, and liquidity on a bank's overall performance. Despite these advancements, gaps remain, especially concerning nonfinancial risks like reputational risk. Reputational risk in banking is complex, with current research offering fragmented insights, particularly regarding its impact on financial outcomes. Many studies have focused on short- term market reactions, neglecting the long-term financial impact on banks, and often overlooking key financial metrics like Return on Assets (RoA) (Cummins et al., 2006; Eckert & Gatzert, 2017; Fiordelisi et al., 2013; Gillet et al., 2010; Perry & de Fontnouvelle, 2005). Heidinger & Gatzert (2018) and Gillet et al. (2010) contributed significantly to understanding the dynamics between reputational risk and RoA, but their research did not explore the direct impact of reputational events on RoA, leaving a crucial aspect unexplored. Furthermore, there's a notable lack of research directly linking the severe reputational damage stemming from operational risks, and especially internal frauds to a bank's financial well-being, specifically in terms of deviations in returns (mainly RoA). Also, most reputational research is confined to U.S. and European regions, lacking a global perspective. The aim of the research was to address these shortcomings by examining the diverse effects of reputational risk resulting from internal fraud on the financial performance of banks, with a particular emphasis on deviations in RoA. The study employed a comprehensive theoretical framework combining the Resource-Based Theory (RBT) and the Unified Theory of Reaction in Assets Market to analyze the dynamics of reputational risk in banking. In order to align with the aforementioned theoretical foundations, the study employs a positivist research paradigm, emphasizing empirical evidence and logical reasoning for the objective validation and generalization of the relationship between reputational risk and the financial performance of banks. The utilization of quantitative methodologies within this paradigm guarantees the requisite methodological rigor and objectivity for a comprehensive and detailed examination. By leveraging reputable data sources like the Global Operational Loss Database (GOLD) by Riskbusiness (UK) for operational loss details, the Bloomberg databases for essential financial metrics, and the World Bank databases for critical macroeconomic indicators, the study ensures it is built upon a foundation of accurate, reliable, and globally recognized data points. Consistent with previous studies, the research used a longitudinal dataset spanning ten years,focusing on commercial and retail banks with operational losses exceeding USD 100,000. The comprehensive and systematic process of identifying operational losses resulted in the selection of 61 instances of internal fraud. These losses are distributed across 18 different currencies, implicating 53 banks situated in 23 countries and 10 distinct geographical regions globally. Considering that the ultimate goal of managing reputational risk, much like the broader risk management framework within a bank, is to continually minimize its influence on pivotal financial indicators like RoA (Coskun et al., 2019; Wanjohi et al., 2017), this research considered adjusting the traditional "event study" methodology and the "market reaction" paradigm commonly employed in reputational research (Cummins et al., 2006b; Eckert & Gatzert, 2017; Fiordelisi et al., 2013b; Gillet et al., 2010b). Instead of focusing on market reactions within an "event window," the study used a panel longitudinal analysis. The estimation of reputational loss was based on the analysis of trends in RoA for a period of three years prior to and following each operational loss event. This was conducted using the Generalized Least Square (GLS) Random Effects model. The rigorous application of multicollinearity, heteroskedasticity, and autocorrelation tests ensures the validity of the random effects model employed. Additionally, the study utilized the Boehmer et al. (1991) test statistic Z, originally developed to detect event-induced volatility in stock returns, to assess the statistical significance of the mean abnormal returns (AR) associated with reputational loss. The collective results of these tests provide substantial evidence that the findings derived from the model are robust and reinforce the credibility of the conclusions drawn from the analysis. The study's findings revealed a substantial negative impact of internal fraud disclosures on banks' RoA, with an average reputational loss of around $54 million. The finding challenges the RBT, which suggests that larger banks (tangible and intangible assets) are better equipped to mitigate reputational crises. Instead, the study found a high positive correlation between the size of the bank and the intensity of the operational loss. Moreover, the research highlighted the importance of a global perspective, revealing significant regional variations in the impact of reputational losses. The study's conclusions contribute significantly to the understanding of reputational risk in the banking sector, offering both theoretical and practical insights. The rejection of the null hypothesis (H01) for banks with at least one negative AR post-event confirmed the critical impact of reputational events on financial outcomes. The study also challenged the assumption that the size of operational losses predicts the extent of reputational damage. Smaller banks were found to be more susceptible to reputational damage, supporting the alternative hypothesis (H3). Additionally, significant regional variations in the impact of reputational losses were confirmed, emphasizing the need for region-specific risk management strategies. This research not only advances academic discourse but also has substantial implications for real-world banking practices. It contributes to a deeper understanding of reputational risk dynamics, challenging existing theories, and offers banks crucial insights for tailoring their risk management strategies based on size and regional factors. Future research should focus on expanding the sample size for a more comprehensive analysis and investigate the integration of a capital charge for reputational risk in banking regulations. DA - 2025 DB - OpenUCT DP - University of Cape Town KW - Bank KW - Finance LK - https://open.uct.ac.za PB - University of Cape Town PY - 2025 T1 - Investigating the significance of reputational risk In banks' financial performance TI - Investigating the significance of reputational risk In banks' financial performance UR - http://hdl.handle.net/11427/41963 ER - | en_ZA |
| dc.identifier.uri | http://hdl.handle.net/11427/41963 | |
| dc.identifier.vancouvercitation | Zinzindohoue SJF. Investigating the significance of reputational risk In banks' financial performance. []. University of Cape Town ,Faculty of Commerce ,Graduate School of Business (GSB), 2025 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/41963 | en_ZA |
| dc.language.iso | en | |
| dc.language.rfc3066 | eng | |
| dc.publisher.department | Graduate School of Business (GSB) | |
| dc.publisher.faculty | Faculty of Commerce | |
| dc.publisher.institution | University of Cape Town | |
| dc.subject | Bank | |
| dc.subject | Finance | |
| dc.title | Investigating the significance of reputational risk In banks' financial performance | |
| dc.type | Thesis / Dissertation | |
| dc.type.qualificationlevel | Doctoral | |
| dc.type.qualificationlevel | PhD |
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