Abstract

Using an event-study framework, we examine the stock market reaction to the announcement of firm withdrawal from countries designated as “State Sponsors of Terrorism” by the U.S. Department of State. We find that such announcements are, on average, linked to a statistically significant increase in firm value—an effect which already kicks in a few days before the announcement date. The observed abnormal returns are positively associated with the U.S. domicile, the intensity of a firm’s hitherto existing engagement in a designated country, the number of countries that it withdraws from, as well as with a withdrawal from Iran compared to a withdrawal from other countries. Evidence suggests an increase in demand for stocks of withdrawing firms as a plausible cause of the positive stock price reaction. Pension and endowment funds are significantly less likely to own strategic stakes in firms with intensive involvements in countries designated as “State Sponsors of Terrorism.” We find some statistical evidence that firms remaining active in such countries have abnormally positive returns in the long run.