Terrorism, militarism, and stock returns

Author:Jeffrey Hobbs, Ludwig Christian Schaupp, Joel Gingrich
Position:Finance, Banking and Insurance, Appalachian State University, Boone, North Carolina, USA; Accounting, West Virginia University, Morgantown, West Virginia, USA; PNC Investments, Charlotte, North Carolina, USA
Pages:70-86
SUMMARY

Purpose - This study aims to examine the effect on stock returns of 28 terrorist and military events occurring between 1963 and 2012. The authors divide the sample and examine these attacks on the basis of industry, country targeted, location, terrorism versus militarism and predicted overall impact. Design/methodology/approach - The authors measure the effects of the events in our sample along several dimensions: in the aggregate; comparatively across industries; by each event’s predicted level of impact; by the type of event (terrorist versus ... (see full summary)

 
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Terrorism, militarism, and stock
returns
Jeffrey Hobbs
Finance, Banking and Insurance, Appalachian State University,
Boone, North Carolina, USA
Ludwig Christian Schaupp
Accounting, West Virginia University, Morgantown, West Virginia, USA, and
Joel Gingrich
PNC Investments, Charlotte, North Carolina, USA
Abstract
Purpose – This study aims to examine the effect on stock returns of 28 terrorist and military events
occurring between 1963 and 2012. The authors divide the sample and examine these attacks on the basis
of industry, country targeted, location, terrorism versus militarism and predicted overall impact.
Design/methodology/approach – The authors measure the effects of the events in our sample along
several dimensions: in the aggregate; comparatively across industries; by each event’s predicted level of
impact; by the type of event (terrorist versus military); by the location of the attack (USA or outside the
USA); and by whether the USA was, directly or by proxy, the primary target of the attack.
Findings – Stock returns are signicantly lower for those industries predicted to be most hurt than for
other industries. Events that the authors predict to be of high impact to the market are followed by
signicantly lower returns than events we predict to be of low impact. Stocks perform signicantly worse on
the days of terrorist events than on the days of military events, but the opposite is true for the day after.
Signicantlylower returns follow events that occur inside the USA or where the USA was the primary target.
Research limitations/implications – This study focuses on 28 high-prole events over a 50-year
period and makes several new contributions to the literature. The authors nd compelling
cross-sectional differences between stock returns at the industry level as well as predictable differences
in mean returns between events. The authors distinguish between terrorist and military attacks and
also separate the sample geographically.
Practical implications – The authors believe that this study can help researchers and investors more
deeply understand the overall market and industry effects of signicant terrorist and military events.
Social implications – By offering a thorough examination of the differences between high-prole
attacks in the context of stock returns both on the day of and the day immediately following those
attacks, the authors hope that people will be able to better grasp the likelihood and magnitude of the
initial damage done by these attacks as well as the subsequent recovery.
Originality/value – Most studies that examine the effects of terrorism on the stock market focus on
one or two specic events or stock market locations. They also tend to concentrate on very specic
characteristics of the attack(s) that they examine, such as the size of the market or the aggregate effect
to that market. The authors study 28 high-prole events over a 50-year period and examine them by
industry, country targeted, location, terrorism versus militarism and predicted overall impact. This
study presents many new results using these classications.
Keywords Event studies, Stock returns, Terrorism, Militarism
Paper type Research paper
JEL classication – G14
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
JFC
23,1
70
Journalof Financial Crime
Vol.23 No. 1, 2016
pp.70-86
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2015-0002
1. Introduction
Several studies have examined the effect of terrorism on stock returns. In this paper, we
attempt to add to and expand upon that literature by using a sample of both terrorist and
military events, largely compiled from documents issued by the US Department of State,
over the period 1963-2012. We measure the effects of the events in our sample along
several dimensions: in the aggregate; comparatively across industries; by each event’s
predicted level of impact; by the type of event (terrorist versus military); by the location
of the attack (USA or outside the USA); and by whether the USA was, directly or by
proxy, the primary target of the attack. In addition to conrming some of the ndings of
the pre-existing literature, we also provide some new results that hopefully will add to
our body of knowledge in this area.
Studies on terrorism vary considerably, but most are specic in some way. For
example, many focus on just one or a few events, a short time period or on specic types
of events. Karolyi (2006) summarizes much of the nancial and economic research on the
effects of terrorism. This research nds that, generally, acts of terrorism do in fact hurt
the stock market. Arin et al. (2008) nd that terrorism affects both the returns and the
volatility of stocks, especially in emerging markets. Baumert et al. (2013) argue that
while the market indeed reacts to terrorism, the effect has diminished in recent years,
while Kollias et al. (2011) nd no clear pattern or change over time for data specic to the
London and Athens exchanges. Similar to Arin et al. (2008), however, the authors do nd
that the smaller market (Athens) is more sensitive to terrorist attacks than is the larger
market (London). Kollias et al. (2011) examined the 2004 Madrid and 2005 London
attacks and found widespread negative returns in Spain along with a slower market
rebound following the attack. Other studies focusing on specic events include Chen
and Seims (2004),Berrebi and Klor (2005),Abadie and Gardeazabal (2003) and Guidolin
and La Ferrara (2005).
Some studies consider the effects of terrorism from other angles. For example,
Johnston and Nedelescu (2006) study the September 11, 2001, New York City and 2004
Madrid attacks from both a market reaction and crisis management standpoint.
Chesney et al. (2011) compare terrorism to nancial crashes and natural disasters and
give investment advice on which industries offer better diversication and better
protection against the acts of terrorism on the whole.
Finally, Karolyi and Martell (2006) examine 75 attacks targeting publicly traded
rms between the years 1995 and 2002. The authors nd a negative stock market return
around such events, especially for those attacks that involved “human capital losses”
such as kidnappings. Interestingly, there is not much industry-level research on the
impact of terrorism. Much of the research that does exist in this area focuses on 9/11.
Cummins and Lewis (2003) examine the effect of the attacks on September 11, 2001, on
property/casualty insurers, Brown et al. (2004) on insurance companies, Kallberg et al.
(2005) on real estate investment trusts (REITs) and Doherty et al. (2003) also on
insurance companies. Alternatively, Drakos and Khutan (2003) examine the effect of
terrorist attacks on the tourism industry in Greece, Israel and Turkey.
This study corroborates the general ndings in the existing literature and also
provides some new results. First, we examine a broad sample of 28 large-scale terrorist
and military events occurring over a nearly 50-year period beginning with the
assassination of John F. Kennedy in 1963 and ending with the attack on the US Embassy
in Libya on September 11, 2012. The breadth of this sample differs from most of the
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Terrorism,
militarism,
and stock
returns

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