The second form of business risk is compliance risk. This type of risk arises in industries and sectors highly regulated by laws. The wine and craft beer industries, for example, must adhere to the three-tier system of distribution in most states, where it is an obligation for a wholesaler to sell beverages to a retailer, who in turn sells it to the end consumer. Wineries, brewers, and distillers cannot sell directly to retail stores. The rules for this can vary widely from state to state. However, there are at least 18 states that do not have this type of distribution system, and compliance risk arises when a brand fails to understand the individual requirements and becomes noncompliant with state-specific distribution laws.
Drug companies are another example. The final say as to whether a new drug can be marketed comes from the Food and Drug Administration (FDA). If a company is approved to release a drug, stock prices can soar. If the FDA declines the company’s request to approve a new drug, the stock will decline to almost nothing as soon as the news hits the tape.
Hit the Tape
The phrase “hit the tape” comes from a time when stock prices and other information was made available to market participants on long ribbons of paper “tape.” Today the phrase means that a change in price for a security or some other information that is likely to influence the price has been made known to the public.
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