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BUSINESS TERM OF THE DAY: Cockroach Theory

19 Jan

Cockroach Theory is a A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.

A cockroach theory suggests that one piece of bad news indicates more bad news will follow.

The name comes from the common belief that the discovery of one cockroach means more are hiding nearby.

A cockroach theory can have crushing effects on an entire industry or a single business.

Investors who buy into a cockroach theory upon hearing bad news, such as a bad earnings report, will pull their support because they expect the worst. The company’s stock value will plummet as investors sell their shares.

Companies can limit the impact of negative earnings by releasing only parts of the story at a time, or by delaying their announcement as long as possible.  Bad news from one company will often be followed by bad news from another in the same industry.

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