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What Is Badwill?

The "cockroach theory" suggests that, like roaches, when one piece of bad news is reported, more is sure to follow. This can lead to more badwill.
A company that is enmeshed in scandal or accused of wrongdoing may create badwill.
Allegations of using child labor may create badwill for a company.
Article Details
  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 November 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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Badwill is a financial term that describes the emotional and financial effects of a revelation that a company has violated laws or business practices. Badwill can occur if a company CEO has been implicated in insider training, if the organization is accused of misappropriation of funds, or if information is released that shows that the business is doing measurable harm in some way. Though badwill may simply take the form of emotional disappointment or displeasure, it can also have a measurable effect on the stock and performance of a company.

The stock market is a surprisingly emotional institution, where trading decisions are often motivated by herd instinct, greed, and fear, as well as by mathematical equations and market forecasts. While all investors are determined to make a profit, it is also important for many to feel that they are investing in legal and safe enterprises. A company that is perceived to be useful, lawful, and socially conscious in some way may create goodwill through its actions. By contrast, a company that is enmeshed in scandal or accused of wrongdoing may create badwill.

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Badwill can quickly become a public relations issue, shaking not only investor fortitude, but consumer confidence as well. For instance, if it is revealed in the press that a clothing company is buying its clothes from sweatshops, a socially conscious segment of the population may veer away from its products, potentially reducing revenue. If it becomes clear that even a significant minority of the public is turning away from a company, investors may start to pull out. Badwill can create an ever-growing cycle of destruction for a business, as dropping revenues lead to falling stock prices, which in turn lead to further falling revenues. Good PR and crisis management can be essential to preventing a cycle of badwill from spiraling out of control.

In addition, the revelation of bad news can create a bigger crisis than is warranted by the actual situation. Market analysts have noted a trend termed the “cockroach theory” that can occur when a company releases bad news. Instead of defusing the situation by explaining the problem, the revelation tends to convince the public that there are other, further violations that remain hidden. The theory is named after the popular maxim that suggests that seeing one cockroach means that there must be more; managing the damage caused by the cockroach theory is an important part of crisis management for any company.

There are many different types of crises that can create badwill. Restaurant chains, food and beverage manufacturers, and grocery stores may suffer for years as a result of recalls, revelations about poor food handling practices, or a bout of illnesses caused by food contamination. Manufacturers of any kind may be in trouble if it is revealed they fail to meet labor practices, allow child or slave labor, or use contaminated materials. Accusations of fraud, embezzlement, insider trading, market manipulation, or other white-collar crimes can be a serious contributor to image issues for nearly any type of company.

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