Terrorism, militarism, and stock returns

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 significantly 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 significantly lower returns than events we predict to be of low impact. Stocks perform significantly worse on the days of terrorist events than on the days of military events, but the opposite is true for the day after. Significantly lower 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-profile events over a 50-year period and makes several new contributions to the literature. The authors find 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 significant terrorist and military events. Social implications – By offering a thorough examination of the differences between high-profile 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 specific events or stock market locations. They also tend to concentrate on very specific 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-profile 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 classifications.

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