Pricing Protest: The Response of Financial Markets to Social Unrest

Abstract

Using a new daily index of social unrest, we provide systematic evidence on the negative impact of social unrest on stock market performance. An average social unrest episode in an typical country causes a 1.4 percentage point drop in cumulative abnormal returns over a two-week event window. This drop is more pronounced for events that last longer and for events that happen in emerging markets. Stronger institutions, particularly better governance and more democratic systems, mitigate the adverse impact of social unrest on stock market returns.

The Economic Consequences of Social Unrest: Evidence from Initial Public Offerings

“…Specifically, stronger IPO activity and market returns decrease the likelihood that an IPO is issued in the months following unrest. This is consistent with the negative relation between unrest and stock returns reported in other studies (e.g., Barrett et al, 2022b). The odds ratio for liquidity indicates IPOs issued after incidents of unrest are more common in more liquid markets.…”

“…For one, we can explore the impact of institutional quality on the relation between social unrest and underpricing. Consistent with prior studies that find that institutional quality affects the relation between social unrest and GDP (Hadzi-Vaskov et al, 2023) and social unrest and stock prices (Barrett et al, 2022b), we find that the effect of social unrest on underpricing is also sensitive to institutional quality. Specifically, we find that the negative association between unrest and underpricing is weaker in places that score better along the following dimensions: control of corruption, government effectiveness, political stability, regulatory quality, rule of law, and voice and accountability.…”

“…Research also links social unrest to stock market performance. Barrett et al (2022b) find that cumulative abnormal returns decrease by 1.4 percentage points on average following social unrest, with greater impact for longer periods of unrest and for unrest in emerging markets. Tanyeri et al (2022) examine how unrest affected the major stock indices of countries touched by the Arab Spring.…”

“…Prior research finds that institutional quality affects the relation between social unrest and GDP (Hadzi-Vaskov et al, 2023) and social unrest and stock prices (Barrett et al, 2022b). Evidence on the relation between institutional quality and underpricing is mixed (e.g., Engelen and van Essen, ©International Monetary Fund.…”

Political Effects on FDI in the CEE Region: Two Cases of Connectivity and Decoupling from the West

“…Elections-2020. Studies show that elections and social unrest can cause an investment downturn (Barret et al, 2021). Belarus faced both of them in May-November 2020: pre-election street activities, postelection social unrest, and weekly street demonstrations.…”