Jen-Hsun Huang breaks record! The first US$4.5 trillion CEO scandal unfolds in the US stock market, and bigger bets will be made in the next week and a half

After the news of Huang Renxun's extramarital affair was announced, Huida's stock price fell 5% before the market opened on Monday. Its scale is difficult to estimate. (Bloomberg)

Wall Street in the United States has priced in many CEO scandals, but it has never priced in a scandal for a company (Huida) with a market capitalization of US$4.5 trillion (NT$148 trillion) and accounting for nearly 7% of the S&P 500 Index.

Huida CEO Huang Renxun admitted in a memo to employees on November 8 that he had an extramarital affair with Huang Le. U.S. intelligence officials believe Huang Le worked for China's Ministry of State Security. "I was unfaithful to my wife," Huang wrote in the memo. Huida's board of directors launched an independent investigation.

Yahoo Finance News reported that after the scandal was announced, Huida's stock price fell 5% before the market opened on Monday. Its scale is difficult to estimate. As of Friday's close, Huida's market value was about four times the combined market value of nine companies hit hard by scandals over CEOs' personal conduct, according to calculations by Yahoo Finance. Intel, the largest of them all, had a market value of about $249 billion when Brian Krzanich resigned in 2018 over a past consensual relationship with an employee. Huida's market value is about 18 times that of Intel.

This is the extreme embodiment of key man risk, the risk that a company's value is entirely dependent on one person. Huang Renxun co-founded Huida in 1993 and has served as CEO until now, with no designated successor.

Taking into account the increase in the size of the stock market, the gap has narrowed but not completely eliminated. Previously, no company involved in the scandal had accounted for more than about 1% of the S&P 500. Only Intel in 2018 and Hewlett-Packard in 2010 had reached that level. Huida's share was about seven times that of Intel and HP.

History has paid the price. A 2018 study published in the Journal of Financial Economics found that when CEOs are exposed in scandals, company stock prices fall by about 4% on average. Given the size of Huida, this is equivalent to a loss of market value of approximately US$185 billion.

Huida shares have fallen about 13% since Oct. 28, the last before the New York Times first published the spy report. The Philadelphia Semiconductor Index fell about 20%, including a post-midterm election plunge. Huida's share price has continued to decline since hitting a record high on October 6.

The impact of a spy scandal can be huge. In 2018, there were reports that Chinese spy chips were implanted in AMD's servers, causing the company's stock price to plummet 41% in one day, but the report was ultimately not confirmed.

Bigger stock bets are focused on the next week and a half. Huida will release its earnings report on November 17, and the Republican chairs of the three House committees will ask Huang to attend a closed briefing on the 18th. The stock options expiring on November 18 mean that the stock price could move by about 11% by then.