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

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  • Guidolin, Massimo
  • La Ferrara, Eliana

Abstract

This Paper studies the relationship between civil war and private investment 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 also use nonparametric techniques with daily data on the intensity of conflict, and find that moderate levels of violence increased the abnormal returns of the ‘Angolan’ portfolio. We interpret our results in the light of the widespread rent seeking in the Angolan mineral industry.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4668.

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Date of creation: Oct 2004
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Handle: RePEc:cpr:ceprdp:4668

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Keywords: Angola; civil war; event studies; rent-seeking;

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  1. Collier, Paul & Hoeffler, Anke, 1998. "On Economic Causes of Civil War," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 563-73, October.
  2. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  3. Svensson, Jakob, 1998. "Investment, property rights and political instability: Theory and evidence," European Economic Review, Elsevier, vol. 42(7), pages 1317-1341, July.
  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. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February.
  6. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
  7. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
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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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