The corporate world is getting battered every day with new revelations of scandal. Of course, the first thoughts are with the victims of this misconduct. From a financial and valuation standpoint, there are consequences at many levels, explains Professor Aswath Damodaran (New York University Stern School of Business). Management distraction, lawsuits, fines, and penalties can all work to derail a company in the short term, but there are long-term effects as well.

Lasting damage: If the “corporate narrative changes as a consequence of the misconduct,” a company can have serious long-term damage, Damodaran writes in his most recent book, Narrative and Numbers: The Value of Stories in Business. “This is due to several reasons. The first is that the scandal can unalterably change the reputation of the company and, to the extent that its narrative was built on that reputation, its story as well. Thus, the news in 2015 that Volkswagen, a company that built its reputation on German efficiency and reliability, had cheated on emissions controls for its diesel cars in the United States could have altered your story line for the company and had large consequences for value. The second is that a key component or components of the company’s business model may have been built on questionable business practices, which, once exposed, can no longer be continued. The third is that large scandals often result in management turnover, with the new management perhaps bringing a different perspective to the company.”