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Globe & Mail (Canada): Terror takes aim at bottom line

Study finds long-term costs of attacks can reverberate into financial spheres

From Tuesday’s Globe and Mail

Kidnappings have a more damaging financial impact on companies than other forms of terrorist attacks, a recent study found.

The study, co-written by a Canadian finance professor, examined 75 terrorist attacks of all types between 1995 and 2002 on publicly traded companies. The study found that the share prices of the affected companies fell on average by 0.83 per cent immediately after the attack. That translated into an average loss in market value of $401-million (U.S.) for each affected company.

The effect was more dramatic when only kidnappings were considered. The share prices of companies struck by the abduction of key employees fell by 1.1 per cent on average, according to the study.

“We find that human capital losses, such as kidnapping of company executives, are associated with larger negative stock price reactions than physical losses, such as bombings of facilities or buildings,” said the study, co-authored by Andrew Karolyi, a Canadian professor at Ohio State University.

Mr. Karolyi said the share prices of the attacked companies remained low for nearly a month and the incidents did not appear to have any impact on the shares of competitors. The study is the first of its kind and Mr. Karolyi said it has sparked some heated debate. It was first published last November and recently updated.

“I’ve had people react to these numbers and say ‘Oh, you are way understating the dimensionality of this because there’s all sorts of indirect costs and spillover costs to other companies,’ ” he said. “Other people have said ‘Oh no, this is way overstating this. You’ve got these crazy people as marginal investors that leap to all sorts of overreactions around these events.’ I don’t know which way to go.”

He said the study was done largely to help the insurance industry and the U.S. government better assess the financial impact of terrorist attacks. And he acknowledged that more work needs to be done.

This study “may be a very coarse and inappropriate measure of the magnitude of these events. It could be that we are missing a lot,” he said.

The research drew on annual data about terrorist attacks compiled by the Counterterrorism Office of the U.S. Department of State. Of the 881 attacks listed between 1995 and 2002, the authors zeroed in on 75 that were directly made against companies. The companies hit most frequently were McDonald’s Corp., with 10 attacks, and Royal Dutch Shell PLC, with nine.

The results excluded the impact of the Sept. 11, 2001, terrorist attacks.

Some of the attacks examined included the bombing of two McDonald’s restaurants in Athens in 1998, an attack on the Allied Bank building in the Philippines in 2001 and several kidnappings and bombings in Colombia.

Of the 75 attacks reviewed, 15 occurred in Nigeria and 14 in Colombia. Oil companies were targets in 34 cases, while food and fast-food businesses were involved in 20 others. The majority of companies hit, 45, were American. Five were Canadian, including a subsidiary of EnCana Corp. that had eight oil workers kidnapped and later released after payment of a ransom in Ecuador in 1999.

Mr. Karolyi said he and his colleagues excluded the Sept. 11, 2001, attacks from part of the research in order to provide a clearer picture of the impact of terrorism on corporations (the study did include those attacks in other calculations).

“We wanted to broaden the perspective across countries and over time, beyond just that one incident, so we could get a better sense of what we are talking about,” he said.

Mr. Karolyi added that the team recently reviewed about 20 terrorist attacks in 2003 and found that the impact on share price was consistent with the earlier attacks.

“People ask me, ‘Do you really believe that there is some sort of terrorism risk factor that’s imbedded in the pricing of these stocks?’ ” he said.

“I can’t say, based on anything we’ve done in this research, that that’s the case. But that’s the very next logical question.”

The impact of terrorism isn’t felt merely in the casualties and damage inflicted. Companies that are targeted also take a significant hit to their stock price, according to a new study.

Losses by company

Royal Dutch Shell, $10.3-billion*

The Anglo-Dutch oil and gas giant has been the victim of numerous terrorist attacks around the world, most recently in Nigeria’s volatile Niger Delta region.

British Petroleum-Amoco Corp.,


Attacked repeatedly in Colombia in the late 1990s, British Petroleum briefly shut down its operations in that country. At one point in 1997, 1,300 local employees refused to work for fear they would become targets of Colombian guerrillas. Last year, a bomb exploded in a building in Tehran that housed BP’s offices.

Coca-Cola, $4.3-billion

The company has become a frequent target over the years for rebel groups protesting against the United States. In 1995, a pipe bomb exploded outside a Coca-Cola warehouse in Istanbul, causing minor damage.

McDonald’s, $3.7-billion

Like Coke, McDonald’s has become a target for anti-American attacks. The company has had several restaurants bombed in recent years. Two sites in Saudi Arabia were firebombed in 2003 while others have been blown up in Indonesia, China and Turkey since 2001.

American Airlines, $ 2.3-billion

The company has had a tumultuous time since the Sept. 11, 2001, terrorist attacks, which involved two of its flights. The airline has long been a target for violence, dating back to an attack by the Unabomber in 1979.

Losses by country

Colombia $13.8-billion

Nigeria $11.2-billion

Russia $2.7-billion

United States $2.6-billion

Belgium $2.4-billion
Losses by terrorist group

ELN, Colombia $11.8-billion

al-Qaeda $2.7-billion

Animal Liberation Fr. $2.4-billion

Sendero Luminoso $2.4-billion

Revolutionary Armed Forces

of Colombia $2-billion



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