Terrorism and the Stock Market

27 Pages Posted: 12 Oct 2005

See all articles by George Andrew Karolyi

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management

Rodolfo Martell

Barclays Global Investors; Purdue University - Krannert School of Management

Date Written: June 2006

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 Classification: G14, G18, G22, G28, H0

Suggested Citation

Karolyi, George Andrew and Martell, Rodolfo, Terrorism and the Stock Market (June 2006). Available at SSRN: https://ssrn.com/abstract=823465 or http://dx.doi.org/10.2139/ssrn.823465

George Andrew Karolyi (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Rodolfo Martell

Barclays Global Investors ( email )

45 Fremont Street
San Francisco, CA 94105
United States

Purdue University - Krannert School of Management ( email )

403 West State Street
KRAN 477
West Lafayette, IN 47907-2056
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
2,676
Abstract Views
8,920
rank
4,480
PlumX Metrics