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Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?

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  • Massimo Guidolin
  • Eliana La Ferrara

Abstract

This paper studies the relationship between civil war and the value of firms in a poor, resource-abundant country using microeconomic data for Angola. We focus on diamond mining firms and conduct an event study on the sudden end of the conflict, marked by the death of the rebel movement leader in 2002. We find that the stock market perceived this event as "bad news" rather than "good news" for companies holding concessions in Angola, as their abnormal returns declined by 4 percentage points. The event had no effect on a control portfolio of otherwise similar diamond mining companies. This finding is corroborated by other events and by the adoption of alternative methodologies. We interpret our findings in light of conflict-generated entry barriers, government bargaining power, and transparency in the licensing process. (JEL D74, G32, O13, O17, Q34)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 5 (December)
Pages: 1978-1993

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:5:p:1978-1993

Note: DOI: 10.1257/aer.97.5.1978
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  1. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February.
  2. Collier, Paul & Hoeffler, Anke, 1998. "On Economic Causes of Civil War," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 563-73, October.
  3. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  4. Abadie, Alberto & Gardeazabal, Javier, 2001. "The Economic Costs of Conflict: A Case-Control Study for the Basque Country," Working Paper Series rwp01-048, Harvard University, John F. Kennedy School of Government.
  5. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
  6. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
  7. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
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  1. Blogs review: The Events Study methodology
    by ? in Bruegel blog on 2012-10-08 09:51:26
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