Political instability and stock market reaction: the Anglo-Iranian oil nationalisation, 1951

"In May 1951, the Iranian government, led by Mohamed Musaddiq, nationalised the assets of the Anglo-Iranian Oil Company (AIOC, now British Petroleum). From the point of view of the AIOC and its shareholders, these events would appear to be unequivocally bad news and to represent a serious failure of corporate policy. Approximately 80% of the company‟s assets were deployed in Iran and therefore subject to confiscation by the Iranian government. However in the months following nationalisation, the AIOC management, in public pronouncements at least, displayed confidence about the subsequent recoverability of the lost assets. Such confidence was potentially well grounded. Working through international legal and political institutions and in Iran, through the Shah and other institutions, including the parliament (Majlis), the media and police, the AIOC exercised considerable influence in the period prior to nationalisation. As a consequence, the impatience of political groups opposed to its domination of the country‟s oil resources intensified, providing momentum to Musaddiq‟s National Front coalition and the passage of the nationalisation act. Behind the scenes meanwhile, the AIOC worked closely through its channels of influence to undermine Musaddiq, including the abortive coup that preceded the successful one organised by the CIA in 1953. Meanwhile in the shorter run, a further reason for the AIOC‟s confidence was its control of the oil industry through resources not subject to nationalisation legislation, such as technical expertise and control over refining, tankers and other distribution channels. To assess the potential threat to the AIOC‟s assets posed by the nationalisation legislation of May 1951, the paper aims to evaluate the relative bargaining strength of the AIOC and Musaddiq governments in economic terms. To do so, it uses an event study methodology, comparing the stock market response to key events in the political negotiation calendar preceding and subsequent to the nationalisation. The AIOC stock price is used as a barometer to test the extent of belief in the long run durability of the nationalisation act factoring the relative strength of the political positions of both sides. The results suggest that the stock market‟s reaction was proportionately small relative to the scale of the assets potentially at risk, reflecting a strong endorsement of the political bargaining power of the company. Indeed, following the overthrow of Musaddiq in the CIA sponsored coup of 1953, and the end of an Iranian democratic experiment already thoroughly undermined, the company fully recovered its assets. With respect to the prior literature, the evidence suggests that the strength of Musaddiq‟s position has probably been overstated, even in 1951 and that in this case at least, the power of big oil remained undiminished in the post-colonial era."