Our present world is crammed with terrorism. It doesn’t only affects peace but it also brings severe damages to the economy. There has been much written about the short-term macroeconomic impact of terrorism attacks on investors risk aversion, equity market valuations, bond yields, oil prices, aggregate consumption and investment activity and even the medium-term effects in the regulatory, trade and fiscal policy responses by governments and the private sector, but much less is known about how this potentially long-lasting heightened terrorist threat affects the stock prices of individual firms.
Some studies have argued it may reveal itself in the psychological fear of terrorism that can affect economic behavior. Let us recall the 9/11 bombing. After that terrorist attack, insurers reduced or even rendered inexistent the supply of terrorism insurance throughout the economy, delaying or preventing many projects from going forward mostly construction in large cities because of creditor or investor concerns. The unprecedented terrorist attacks on that dreaded September 11, 2001 caused massive casualties and damage and ushered in an era of great uncertainty. That shocking display of brute force also changed the way we think about terrorism and moved the topic to the front-burner of academic and public attention. One important way in which we have changed our perspective about terrorism is as a geopolitical risk that affects the global economy and financial markets.
G. Andrew Karolyi and Rodolfo Martell, examined the stock price impact of terrorist attacks. Using an official list of terrorism-related incidents compiled by the Counter-terrorism Office of the U.S. Department of State, they identified 75 attacks between 1995 and 2002 in which publicly traded firms are targets. Looking at the event study analysis around the day of the attacks uncovers evidence of a statistically significant negative stock price reaction of -0.83%, which corresponds to an average loss per firm per attack of $401 million in firm market capitalization. A cross sectional analysis of the abnormal returns suggests that the impact of terrorist attacks differs according to the home country of the target firm and the country in which the incident occurred. Terrorist attacks in countries that are wealthier and more democratic are associated with larger negative share price reactions. Most intriguingly, we see that human capital losses, such as kidnappings of company executives, are associated with larger negative stock price reactions than physical losses, such as bombings of facilities or buildings.