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(Last updated 5/23/06)



COLUMBUS , Ohio – Terrorist attacks targeting specific companies cost those firms an average of $401 million in stock value per incident, according to a new study.

Researchers studied 75 terrorist incidents around the world between 1995 and 2002 and found that the target companies saw their stock prices drop an average of 0.83 percent on the day of the terrorist incident.

Andrew Karolyi

“There's a dramatic and reliable negative impact on stock prices as a result of terrorist incidents, and there's no immediate reversal of that impact,” said G. Andrew Karolyi, co-author of the study and professor of finance at Ohio State University 's Fisher College of Business.

“While companies don't continue to lose stock value in the days and weeks following an attack, they don't regain value either,” Karolyi said.

Karolyi conducted the study with his former PhD student, Rodolfo Martell, now a faculty member at Purdue University. Karolyi presented their results recently at the Global Investment Conference in Banff, Alberta.

While the impact of terrorism on the stock market has received a lot of attention in the past several years, most studies have focused on the Sept. 11, 2001 attacks and on American firms.

“Terrorism is not new. It has been around a long time. So we wanted to widen the lens and take a longer-term perspective on this, so we could see beyond the United States and beyond 9/11,” Karolyi said.

For their study, the researchers used a data set that they believe has not been used for this kind of study before. The data came from the annual “Patterns of Global Terrorism” reports prepared by the Counterterrorism Office of the U.S. Department of State.

They used all the reports available – 1995 to 2002 – and examined the 75 cases where a publicly traded firm was specifically mentioned as the target of a terrorist act. Those 75 attacks targeted 43 different firms.

Some of the terrorist attacks analyzed in the study included the October 1998 kidnapping in Ecuador of three employees of the Santa Fe Oil Company, and the December 2000 bombing of a Citibank ATM in Athens, Greece.

The results included the 9/11 terrorist attack, but the researchers ran analyses with and without that incident to ensure that this single attack didn't skew the results.

Including the corporate victims of 9/11 (US Air, United and American Airlines all suffered large losses in stock value as a result of the attack), firms targeted by terrorists lost 2.2 percent of their stock value on the day of the attack. Not including 9/11, firms lost an average of 0.83 percent. That would correspond to an annualized negative return of 8.03 percent.

The findings showed that the corporate competitors of terror attack victims were unaffected by the incidents – their stock value neither went up or down significantly as a result.

“There weren't any spillover effects in which investors thought a terrorist attack would affect other companies in the industry, either positively or negatively,” Karolyi said.

One finding that Karolyi found surprising was that kidnappings of corporate executives had a larger negative effect on stock values than did bombings of corporate buildings or infrastructure.

“It was surprising in one sense because the kidnappings did not involve the senior executives of the companies that were targeted. Also, the companies did not lose any physical assets such as buildings. But investors are reading into these events that there is a broader, more significant terrorism risk for these firms when one of their officials is kidnapped,” he said.

Results also showed that firms located in richer countries, more educated countries, and more democratic countries, all suffered larger stock value losses as a result of terrorist attacks than did firms in other countries.

Democratic, more open societies have a harder time responding effectively to terrorism, Karolyi said, which may be one reason why stock losses are higher there. Firms in richer, more educated countries are also more likely to be targeted.

The United States fits the profile of a country in which firms are likely to suffer larger losses as the result of terror attacks, he said. While the results showed this to be true, U.S. firms fared no worse than those in other similar democratic, wealthy countries.

Karolyi said results like those in this study are especially important as the Congress decides the fate of the U.S. Terrorism Risk Insurance Act.

TRIA was passed in 2002 to create a three-year federal program that backs up insurance companies and guarantees that certain terrorist-related claims will be paid. The program was recently extended by two years as Congress decides whether it should be renewed and, if so, how much money will be available for claims.

Congress had planned TRIA to be a temporary solution while insurance companies had time to develop appropriate coverage in the post-9/11 world, Karolyi said. But insurance companies have argued that they will still need government backup to provide meaningful coverage.

This study provides solid data to help insurance companies and the U.S. government to estimate how much terrorist attacks actually cost companies, according to Karolyi.

“By computing a measure of the average stock market impact suffered by firms affected by terrorist attacks, our results can help insurers better quantify the expected losses from these attacks,” he said.


Andrew Karolyi (614) 292-0229; Karolyi@cob.osu.edu

Written by Jeff Grabmeier, (614) 292-8457; Grabmeier.1@osu.edu