This paper conducts an event study analysis of the impact of operational loss events on the market values of banks and insurance companies, using the OpVar database. We focus on financial institutions because of the increased market and regulatory scrutiny of operational losses in these industries. The analysis covers all publicly reported banking and insurance operational risk events affecting publicly traded US institutions from 1978 to 2003 that caused operational losses of at least $10 million – a total of 403 bank events and 89 insurance company events. The results reveal a strong, statistically significant negative stock price reaction to announcements of operational loss events. On average, the market value response is larger for insurers than for banks. Moreover, the market value loss significantly exceeds the amount of the operational loss reported, implying that such losses convey adverse implications about future cash flows. Losses are proportionately larger for institutions with higher Tobin’s Q ratios, implying that operational loss events are more costly in market value terms for firms with strong growth prospects.

By buying convertibles and shorting the underlying stock, hedge funds distribute equity exposure to well-diversified shareholders. We find that firms with characteristics that make seasoned equity offerings expensive are more likely to issue convertibles to hedge funds. We conclude that hedge funds provide opportunities for firms to issue convertible securities at a lower cost than seasoned equity by serving as relatively low-cost distributors of equity exposure. A higher fraction of a convertible is privately placed with hedge funds when institutional ownership, stock liquidity, issue size, concurrent stock repurchases, and limitations on callability suggest that shorting costs will be lower.