Financial Impact of Firm Withdrawals from State Sponsor of Terrorism Countries
37 Pages Posted: 5 Jan 2012 Last revised: 2 Sep 2017
Date Written: May 16, 2015
Abstract
Using an event-study framework, we examine the stock market reaction to the announcement of firm withdrawal from countries designated as “State Sponsors of Terrorism” by the U.S. Department of State. We find that such announcements are, on average, linked to a statistically significant increase in firm value – an effect which already kicks in a few days before the announcement date. The observed abnormal returns are positively associated with U.S. domicile, the intensity of a firm’s hitherto existing engagement in a designated country, the number of countries that it withdraws from as well as with a withdrawal from Iran compared to a withdrawal from other countries. Evidence suggests an increase in demand for stocks of withdrawing firms as a plausible cause of the positive stock price reaction. Pension and endowment funds are significantly less likely to own strategic stakes in firms with intensive involvements in countries designated as “State Sponsors of Terrorism”. We find some statistical evidence that firms remaining active in such countries have abnormally positive returns in the long run.
Keywords: firm withdrawal, sin stocks, State Sponsors of Terrorism, stock price reaction
JEL Classification: G11, G14, G15, G23, G32
Suggested Citation: Suggested Citation
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