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The Arab Spring and the International Defense Market

Published online by Cambridge University Press:  29 October 2020

Jeroen Klomp Open the ORCID record for Jeroen Klomp [Opens in a new window]
Jeroen Klomp*
Affiliation:
Netherlands Defence Academy, Faculty of Military Sciences, The Netherlands
*
Corresponding author: Jeroen Klomp, Email: klomp_j@yahoo.com
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Abstract

The aim of this study is to analyze the impact of the political violence during the Arab Spring on the stock market return of international defense firms. The direction of this impact is not directly straightforward as the civil unrests influence the expectations of investors in two opposite ways. On the one hand, investors might expect that when the peaceful demonstrations were turned into violent events, the Arab governments involved will start acquiring more military-strategic goods to repress the protests or send a strong signal of power to ensure their stay in office. However, on the other hand, when the popular protests escalated, investors, perhaps, became more concerned about the possible imposition of international military sanctions against the Arab Spring countries to restore peace and protect human rights. The main empirical findings of a dynamic panel model clearly confirm this pattern and point out that when the Arab Spring originated, the abnormal return of international defense stocks starts to rise immediately. However, in the course of time, the concerns of the introduction of arms embargoes become stronger and eventually start to dominate, causing the abnormal return to fall again, while the idiosyncratic risk began to fall due to enhanced diversification. It turns out that firm-specific factors can explain a substantial part of the effect found. For instance, the reaction of investors to the Arab Spring is significantly larger for firms that produce predominantly military goods.

Keywords

Arab Springdefense industryabnormal return
Type
Research Article
Information
Business and Politics , Volume 23 , Issue 2 , June 2021 , pp. 202 - 220
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press on behalf of V.K. Aggarwal

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