Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
The effects of war risk on managerial and investorbehavior: Evidence from the Brussels Stock Exchange in
the pre-1914 era
Gertjan Verdickt
May 15, 2019
Gertjan Verdickt The effects of war risk May 15, 2019 1 / 27
The Uneasiness in Europe
The general beliefs of Europe that war is improbable this year is probablywell founded ... but we should be wanting in our duty if we did not point
out that some lowering clouds are settling over Europe(The Economist, July 1887)
Gertjan Verdickt The effects of war risk May 15, 2019 1 / 27
The French declaration of war against Madagascar
The English have no right to prevent the French from conqueringMadagascar if they can. . . . It is natural, therefore, that the British
should sympathize with the Malagasy in the coming war.(The Economist, November 1894)
Gertjan Verdickt The effects of war risk May 15, 2019 2 / 27
Motivation
Newspaper archives are a detailed source of narrative history
Measuring disaster risk is a challengeI Using the start of the crisis misses the buildup to the eventI Difficult to continuously track changes in risk
Solution: Use The Economist as proxy of European news coverageI Turn to the build-up to the First World War as the risk playgroundI Focus on the Brussels Stock Exchange (BSE)
Do manager mitigate war risk?How do investors respond to a rising threat in war?
Gertjan Verdickt The effects of war risk May 15, 2019 3 / 27
Previous literature
Dividends:
Dividends were a key information channel (Braggion Moore, 2011)
Dividend cuts have a negative impact on prices (Turner et al. 2013)
What about the threat of war?
War threat:
Risk premia of Japanse bonds increase (Sussman et al, 2000)
War has a negative effect on prices (Berkman et al, 2011)
What with international evidence?
Gertjan Verdickt The effects of war risk May 15, 2019 4 / 27
A unique time period
January 1885 - June 1914
Characterized as a period of ”mounting tension”
Changing alliances and intensifying arms race
Exogenous to economic environment and business cycle behavior
Globalization reached peak levels before World War I
News dissemination: no internet, TV, telegraph,...
British newspapers were sold in Europe and the US
Gertjan Verdickt The effects of war risk May 15, 2019 5 / 27
A unique time period
Belgium was always neutral in military conflicts ....BUT:
Trade accounted for more than 80pct of GNP
Highest increase in exports in Europe
BWP had trade as one of its key items on the program
Foreign companies paid in stocks for their export
Gertjan Verdickt The effects of war risk May 15, 2019 6 / 27
A unique time period
Brussels Stock Exchange
One of the first countries to industrialize in Europe
Large inflow of (foreign) capital and investors
Downside: vulnerable to (military) shocks abroad
Top 10 of largest stock exchanges in the world
Diversified in terms of sectors
Stock listings from 26 different countries
Gertjan Verdickt The effects of war risk May 15, 2019 7 / 27
War risk measure
Monthly count of war-related articles
”War” or ”Military”I THREAT : “risk” “concern” “uncertain” “threat” ”fear” “tension”I ACT : “invasion” “start” “beginning” “battle” ”army” “outbreak”
Articles must also discuss, at least, one country:I A main trade partner of BelgiumI A large number of foreign stock listings
In practice: BEL, FRA, GER, ITA, NL, SPA, RUS and UK
Gertjan Verdickt The effects of war risk May 15, 2019 8 / 27
War risk measure
Gertjan Verdickt The effects of war risk May 15, 2019 9 / 27
War risk measure
Choice of words
Uni- and bigram analysis of 4 books on World War 1
Following Caldara and Iacovello (2018)
Audit studyI Total number of articles 100,803I Number of articles in selected sections: 68,064 (67.52 pct.)I Relevant articles: 2,249 (2.36 pct.)
Robustness test for other words: +-98 pct. are in WRMsI Mobilization: 5 additional articlesI Danger: 28 additional articlesI Attack: 4 additional articles
Gertjan Verdickt The effects of war risk May 15, 2019 10 / 27
War risk measure
Why for The Economist?
Weekly magazine
One glossary
Quality and depth
Key assumption
The Economist is a good proxy for European war news coverage
I do not require investors read The Economist
Crafts and Mills (2013) and Ferguson (2006)
Gertjan Verdickt The effects of war risk May 15, 2019 11 / 27
Research question
1. How do firms mitigate the effect of war risks?2. What is the impact of a rise in war risk on stock prices?
Gertjan Verdickt The effects of war risk May 15, 2019 12 / 27
Methodology
Regression model:
Yt = α + βThreatt + βActet + βXt + εt
where Y is dividend growth
Act is the residual from Threat regression
where X are control variables
Gertjan Verdickt The effects of war risk May 15, 2019 13 / 27
Dividend policy
Pooled regression and panel with sector and country fixed effects
*, **, and *** represent significance at the 10pct, 5pct and 1pct
Gertjan Verdickt The effects of war risk May 15, 2019 14 / 27
What do managers do?
Is dividend policy adjustment a spurious finding?
Gertjan Verdickt The effects of war risk May 15, 2019 15 / 27
Equity IPO
*, **, and *** represent significance at the 10pct, 5pct and 1pct
Gertjan Verdickt The effects of war risk May 15, 2019 16 / 27
Bond IPO
*, **, and *** represent significance at the 10pct, 5pct and 1pct
Gertjan Verdickt The effects of war risk May 15, 2019 17 / 27
Stock delisting
*, **, and *** represent significance at the 10pct, 5pct and 1pct
Gertjan Verdickt The effects of war risk May 15, 2019 18 / 27
Research question
1. How do firms mitigate the effect of war risks?2. What is the impact of a rise in war risk on stock prices?
Gertjan Verdickt The effects of war risk May 15, 2019 19 / 27
Methodology
Predictive regressions:
Yt,t+h = α + βThreatt + βActet + βXt + εt
where Y is expected returns
Act is the residual from Threat regression
where X are control variables
Gertjan Verdickt The effects of war risk May 15, 2019 20 / 27
Expected returns
Pooled regression through GMM procedure
*, **, and *** represent significance at the 10 pct., 5 pct. and 1 pct.
Gertjan Verdickt The effects of war risk May 15, 2019 21 / 27
Local or global effect?
Are other countries affected by war risk?
Gertjan Verdickt The effects of war risk May 15, 2019 22 / 27
Other European countries
Panel data with sector and country FE
*, **, and *** represent significance at the 10pct, 5pct and 1pct
Includes Austria, Luxembourg, Greece, Servia, Portugal and Poland
Gertjan Verdickt The effects of war risk May 15, 2019 23 / 27
Non-European countries
Panel data with sector and country FE
*, **, and *** represent significance at the 10pct, 5pct and 1pct
Includes Argentina, Brazil, Cameroon, Canada, China, Congo,...
Gertjan Verdickt The effects of war risk May 15, 2019 24 / 27
Key take-aways
War risk does matter!
Managers mitigate war risk:
They adjust dividend policy
They postpone key firm financing decisions
Foreign firms more likely to delist
Investors respond to war risk:
Countries that are mentionedI Threat: Mean-reversionI Act: Negative drift
European countries that are not mentioned:I Threat: No relationshipI Act: Proximity to conflicts
Gertjan Verdickt The effects of war risk May 15, 2019 25 / 27
Still relevant?
Gertjan Verdickt The effects of war risk May 15, 2019 26 / 27
Questions?
Gertjan Verdickt The effects of war risk May 15, 2019 27 / 27