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

  • Massimo Guidolin
  • Eliana La Ferrara

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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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. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June.
  2. 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.
  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. Simon Johnson & Todd Mitton, 2001. "Cronyism and Capital Controls: Evidence from Malaysia," NBER Working Papers 8521, National Bureau of Economic Research, Inc.
  5. Collier, Paul & Hoeffler, Anke, 1998. "On Economic Causes of Civil War," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 563-73, October.
  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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