Now that WikiLeaks is not entirely “blowing up” the news, it has given me time to think about one of the latest Wikileaks developments dating back to December 2010. An online article “Be Afraid,” published by The Economist, states that,
“WikiLeaks, a whistle-blowing website, promised to publish five gigabytes of files from an unnamed financial institution early next year, bankers everywhere started quaking in their hand-made shoes.”
My question is this: How does the exposure of commercial secrets, such as those published by WikiLeaks, affect stock valuation? This question is a little tricky. Let’s look at short-term and my predicted (optimistic) long-term effects on companies and stock affected.
Short term: After Wikileaks’ founder, Julian Assange told Forbes that he was going to leak a massive amount of information on an American bank, Bank of America’s stock dropped close to 3%. Keep in mind that last year, Assange was quoted by Computer World, “At the moment, for example, we are sitting on 5GB from Bank of America, one of the executive’s hard drives.” In a nutshell, BofA stock dipped 3%; however, the next day it recovered by 1% . These percentages show BofA’s investors reactions to WikiLeaks; however it still does not justify BofA’s performance compared to the KBW Bank Index. Short term speculation made the stock price dip briefly; however, the almost instant recovery and 3% drop shows investor trust.
A huge problem that BofA faced in this situation was the pending, looming threat of having information leaked. Investors can only assume that information that is worthy of being leaked is negative news, not to mention the lack of security that BofA has over its confidential information, considering BofA is a bank, with people’s money, credit and personal information on the line. The initial effects of the stock is the short term.
Long term: Suppose WikiLeaks did expose BofA’s 5GB of information. There is no doubt in my mind that the stock would fall substantially. No investor likes investing in a company which is being portrayed as a villain. The major long-term effect of WikiLeaks on a company is the effect the leak has on the trust of the investor. If the investor feels lied to or kept away from information, the stock will most likely be dumped and the stock price will fall. In a nutshell, the stock price will affect the company-investor relationship. If the investor is being exposed to information they were not intended to see and the reaction is negative, the value in the company will suffer.
On the other hand, having company information being leaked may be unwanted but may also create PR opportunities for a company such as BofA. The forced transparency of the leaks will allow BofA to address their stakeholders’ issues of concern. BofA would be able to rebuild their image on trust and develop initiatives which promote corporate transparency and 2-way communication with stakeholders.
Regardless if WikiLeaks has, had, will have, or will leak information on BofA or any bank for that matter; companies and banks should become more transparent and trustworthy to ensure their investors trust, in the event that information is leaked. Companies need to reach out to their stakeholders, tell them what they need to know before WikiLeaks does, and start a dialog with stakeholders before leaked information has the opportunity to damage reputations. If information is leaked, a crisis plan needs to be prepared and executed. The key to reduce the damages brought forth by leaked information is by being honest. Stakeholder trust in a company = stakeholders trust in the stock. A company with nothing to hide is not afraid of WikiLeaks.