Risk and risk management of spillover effects: Evidence from the literature

• Date: 01 March 2020
• Author: Christian Eckert
• Published date: 01 March 2020
• DOI: http://doi.org/10.1111/rmir.12139

Risk Manag Insur Rev. 2020;23:75–104. wileyonlinelibrary.com/journal/rmir

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75

Received: 3 June 2019

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Accepted: 18 January 2020

DOI: 10.1111/rmir.12139

PERSPECTIVE

Risk and risk management of spillover effects:

Evidence from the literature

Christian Eckert

School of Business, Economics, and Society,

Friedrich‐Alexander University

Erlangen‐Nürnberg (FAU), Nürnberg,

Germany

Correspondence

Christian Eckert, School of Business,

Economics, and Society,

Friedrich‐Alexander University

Erlangen‐Nürnberg (FAU), Lange Gasse 20,

90403 Nürnberg, Germany.

Email: christian.eckert@fau.de

Abstract

In this article, we provide a comprehensive review of the

existing theoretical and empirical literature regarding

spillover effects (effects of a crisis event in an announ-

cing firm on other firms). In particular, we focus on the

mechanism behind spillover effects and investigate fac-

tors that drive spillover effects. The results of our lit-

erature analysis show that spillover effects are most

often significantly negative, that is, lead to losses in

nonannouncing firms and depend on certain events and

firm characteristics. On this basis, we derive implica-

tions for the risk management of spillover effects. Tak-

ing previous work on certain individual risk‐

management measures into account, we are the first to

provide a holistic spillover risk‐management process.

JEL CLASSIFICATION

G14; G32

1|INTRODUCTION

In this article, we consider spillover effects (typically measured by means of market value losses

or gains) to a nonannouncing firm caused by a certain crisis event in an announcing firm.

Previous theoretical literature regarding spillover effects examines the mechanism behind

spillover effects (see, e.g., Jonsson, Greve, & Fujiwara‐Greve, 2009; Yu and Lester, 2008)

and argues (see, e.g., Lang and Stulz, 1992) that spillover effects are the sum of two offsetting

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2020 The Authors. Risk Management and Insurance Review published by Wiley Periodicals, Inc. on behalf of American Risk and

Insurance Association

effects: the competitive effect and the contagion effect. The competitive effect means that

nonannouncing firms can benefit from the loss event in the announcing firm, whereas the

contagion effect implies that the nonannouncing firm also suffers a financial loss. As both

effects can appear simultaneously, spillover effects are always the net effect of them and in-

dicate whether the competitive effect dominates the contagion effect or vice versa.

Another strand of the literature empirically investigates whether crisis events (most often

operational losses) have the potential to cause spillover effects and which factors influence

them (see, e.g., Cummins, Wei, & Xie, 2012; Goins and Gruca, 2008; Szewczyk, 1992). Some

articles analyze spillover effects caused by specific events (e.g., Barnett (2007) examines the

effects of the Bhopal disaster on other nonannouncing chemical firms), whereas other articles

investigate spillover effects caused by certain events types in general (e.g., Cummins et al.

(2012) study spillover effects in the financial industry caused by large operational losses).

Finally, there are also a few papers regarding risk management of spillover effects. For

instance, Barnett and Hoffman (2008) deal with risk management of spillover effects from a

single‐firm perspective, whereas Baniak and Grajzl (2013) take an industry perspective.

Hence, there is a lot of previous research on this topic. However, an overview of the literature

combining the results of the empirical and the theoretical literature as well as relating them with

risk‐management strategies of spillover effects is still due. The first contribution of our paper is,

therefore, to provide a comprehensive review of the theoretical as well as empirical literature

concerning spillover effects. By comparing and analyzing the results of previous studies, we ex-

pand existing knowledge in this area. One main finding of our empirical literature review is that

spillover effects are most often negative and depend on influencing factors. In particular, ch ar-

acteristics of the announcing and nonannouncing firm (e.g., size), as well as event characteristics

(e.g., loss size), affect spillover effects. The second contribution is that we derive based on our

literature review implications for the risk management of spillover effects (e.g., identification of

factors that drive the occurrence and severity of spillover losses) and provide a comprehensive risk‐

management process regarding spillover effects, which has not been done before.

The paper is structured as follows: Section 2gives an overview of the theoretical literature,

whereas Section 3focuses on the empirical literature. Section 4discusses risk‐management

strategies with respect to spillover effects, and finally, Section 5summarizes.

2|THEORETICAL EVIDENCE REGARDING SPILLOVER

EFFECTS

Crisis events have the potential to cause severe reputational losses in the announcing firm

1

and

spillover effects to other nonannouncing firms.

2

Nonannouncing firms, potentially affected by

spillover effects, are competitors and suppliers of the announcing firm. Previous theoretical

literature regarding spillover effects argues (see, e.g., Lang and Stulz, 1992) that spillover effects

are the sum of two offsetting effects: the competitive effect and the contagion effect.

Assuming that the nonannouncing firm is a competitor of the announcing firm, for example,

Lang and Stulz (1992) and Eckert, Gatzert, and Pisula (2019) explain that, for instance, cus-

tomers might buy products of nonannouncing firms instead of products of the announcing firm

1

See, for example, Gatzert (2015) for a review of the empirical evidence of reputation‐damaging events on financial performance or Fiordelisi, Soana, and

Schwizer (2014) for an empirical investigation.

2

See, for example, Cummins et al. (2012).

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