The Effect of Terrorist Attacks on Shareholder Value: A Study of United States International Firms

By Hergert, Michael | International Journal of Management, March 2004 | Go to article overview

The Effect of Terrorist Attacks on Shareholder Value: A Study of United States International Firms


Hergert, Michael, International Journal of Management


The U.S. economy has entered a new era of battling terrorism. The financial world was rocked by the events of September 11, 2001 and continues to struggle with the valuation affirms in an uncertain global operating environment. This study examines the impact of the terrorist attacks of 9/11 on shareholder value in the presence of international business exposure. The analysis concludes that firms with extensive international operations were penalized in the equity markets as a result of 9/11. The study examines stockholder returns both one week and one year after the attacks. The findings indicate that the valuation affirms with a high percentage of foreign sales fell disproportionately immediately after the attacks and that these firms continue to sell at a relative discount one year later.

The events of September 11, 2001 have had a profound impact on American society and business practice. Although more than a year has passed since that day, there is still considerable uncertainty about the longer term implications of an on-going war against terrorism. It is clear that terrorism will exact a financial toll on the world economy. The costs of homeland security and a renewed commitment to military infrastructure will create a terrorism tax that diverts resources away from other uses.

The forces behind globalization during the last few decades are likely to continue, improvements in communications, information technology, and transportation will provide an impetus to further globalization of commerce. However, the new impediments of terrorism and political risk are likely to force corporations to reconsider their commitments to international trade. A flight to safety is already underway. World trade is expected to grow less than 2% in 2002- the lowest level in over two decades.

The impact of the terrorism tax is likely to fall greatest on firms active in international commerce. The costs and delays of increased border security, new export controls, rising insurance costs, reductions in market access, and new cross-border financial regulations may create constraints on multinationals that could permanently change their strategic orientation towards international trade. This study examines the role of international exposure in determining the stock market reaction to the events of September 11, 2001. In the period immediately following 9/1 !,all major capital markets fell dramatically. With the exception of firms linked to military markets or security services, stock prices tumbled due to the tremendous uncertainty about the U.S. economic and political outlook. Market values continued to slide during the year following 9/11. The combination of a lingering economic recession and the ongoing war on terrorism kept equity markets in a downward slide for most of the year. This study analyzes the role of international trade exposure in determining the magnitude of this slide. There is strong evidence that firms which are most active in international commerce were penalized in the equity markets. International exposure led to reductions in market capitalization both immediately after 9/11 and continued through a year later.

Sample and Methodology

The sample of firms in this study was drawn from firms in the S&P 500 index which participate in manufacturing industries (SIC codes 2011-3099). …

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