Terrorism and the Stock Market

Abstract:     
This paper examines the stock price impact of terrorist attacks. Using an official list of terrorism-related incidents compiled by the Counterterrorism Office of the U.S. Department of State, we identify 75 attacks between 1995 and 2002 in which publicly traded firms are targets. An 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 indicates that the impact of terrorist attacks differs according to the home country of the target firm and the country in which the incident occurred. Attacks in countries that are wealthier and more democratic are associated with larger negative share price reactions. Most interestingly, we find 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. We discuss the implications of these findings for existing research on terrorism and for current policy debates regarding terrorism re-insurance programs.

Keywords: Terrorism, Terrorism Risk Insurance Act (TRIA), event study, government policy

JEL Classifications: G14, G18, G22, G28, H0

Working Paper Series