Diamonds Are Forever, Wars Are Not: .2cm Is Conflict Bad ... · Diamonds Are Forever, Wars Are Not:...

Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions

IGIER VISITING STUDENTS' PRESENTATION

Diamonds Are Forever, Wars Are Not:

Is Con�ict Bad for Private Firms?

Massimo Guidolin and Eliana La Ferrara

Friday, March 21, 2014

Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi


Table of Contents

1 Literature Review

2 Study Setting

3 Experimental and Regression Design

4 Main Findings

5 Conclusions



It seems clear to us that civil war ought to be central

in the study of international economic development. Yet

leading development economists have too often overloo-

ked it; for instance, two respected and widely taight

undergraduate development economics textbooks (Ray

1998; Todaro 1999) do not contain the words �war�, �con-

�ict�, or �violence� in their subject index.

C. Blattman and E. Miguel �Civil War� (2010)

C. Blattman

E. Miguel



Why development economists should focus on civil con�ict?

1 Nowadays civil con�icts are far more common than international con�icts.



Why development economists should focus on civil con�ict?

2 Majority of recent intra-state con�icts happened in the poorest region ofthe world.



Causes of civil con�icts

Macro level studies

Collier and Hoe�er �On the Economic Causes of Civil War� (1998) and�Greed and Grievance in Civil War� (2004)

Miguel, Satyanath and Sergenti �Economic Shocks and Civil Con�ict�(2004)

Micro level studies

Dube and Vargas �Commodity Price Shocks and Civil Con�ict: Evidencefrom Colombia� (2009)



Macro level causes

Collier and Hoe�er �On the Economic Causes of Civil War� (1998)

Findings: initial income, ethno-linguistic fractionalization, naturalresources, initial population size are the main determinants.

Nonmonotonic relationships between civil wars and both natural resourcesand level of societal fragmentaton.



Macro level causes

Notes: primary=share of primary commodity exports to GDP in 1965ELF= index of ethno-linguistic fractionalization in 1960

population= population in 1960 in 10,000



Macro level causes

When regressing the probability of con�ict on economic determinants, it isdi�cult to obtain unbiased estimates!

Omitted variable bias

Reverse causality

Measurement Error



Macro level causes

Miguel, Satyanath and Sergenti �Economic Shocks and Civil Con�ict�(2004)

Instrumental Variable Approach: rainfall variation in 41 African countries(1981-1999).

Fundamental conditions for rainfall variation to be a valid instrument:Relevance condition

Exogeneity

Main Findings: economic variables have a high explanatory power.



Micro level causes

Dube and Vargas �Commodity Price Shocks and Civil Con�ict: Evidence from

Colombia� (2009)

Higer income has two contrasting e�ects on the probability of triggering acivil war:

Opportunity e�ect: less incentives to join rebel groups, negatively relatedwith civil war

Rapacity e�ect: gains from appropriations through rebellion actionsincrease, positively related with civil war.



Micro level causes

Main �nding: the prevailing e�ect depends on the type of good.

For capital intensive goods the rapacity e�ect is dominant: correlationbetween oil price increase and higher number of paramilitary attacks in1998-2005.

For labour intensive goods the opportunity e�ect is prevalent: correlationbetween co�ee price decrease in 1990 and increased violence.



Short run e�ects

E�ects of civil wars on �rms' performances are not clear:

Abadie and Gardeazabal (2003) �nd that the cease�re in the Basque civilwar had a positive impact on �rms' stocks

Guidolin and La Ferrara (2007) show that the end of the Angolan civil wardecreased the returns on diamond mining enterprises.

Low external validity: results on the e�ects of civil war may vary a lot ifdi�erent areas are considered.



Table of Contents

1 Literature Review

2 Study Setting


4 Main Findings

5 Conclusions



Political scenario

Opposing parties in Angola after independence from Portugal in 1974:

Movimento Popular de Libertaçao de Angola (MPLA) led by JoséEduardo dos Santos

Uniao Nacional para a Independencia Total de Angola (UNITA) led byJonas Savimbi.



Timing of the events

MPLA wins national elections in 1992; UNITA does not recognize theresult and starts a civil war.

Lusaka Peace Protocol in 1994: UNITA is given legal rights to mine andto form partnerships with foreign companies.

Collapse of the peace process in 1998: intense �ghting until February2002.

22 February 2002: Jonas Savimbi dies in an ambush.

4 April 2002: cease-�re is signed.



Diamond industry in Angola

Angola is one of the largest diamond producers by value in the world.

In 2000 diamond sales reached $1.1 billion.

Close link between diamond industry and con�ict:

MPLA mainly �nanced its military operations with sales of oil and o�cialdiamond concessions

UNITA through diamond sales after illegal occupation of many mines.



Table of Contents

1 Literature Review

2 Study Setting


4 Main Findings

5 Conclusions



Methodology

Event Study to understand how con�ict in�uences the value of diamondmining companies.

Market model

rt = α+ βrMt + θSt + et

rt: daily rate of return on a stock

rMt : return on the market portfolio

St: set of dummies for company-speci�c events unrelated to Angolanpolitical events

et: unexplained residual, called abnormal return



Methodology

For each political event, estimation window and event window are used to�nd the relationship between an unexpected shock in stocks' value andpolitical events:

1 Estimate the market model in the estimation window and �nd α̂, β̂, θ̂.

2 Predict et in the event window.

3 Generate the series of cumulative abnormal returns from the �rst day ofthe event window:

CARt =∑t

j=to−k ej



Methodology

CARs are aggregated for two di�erent portfolios of companies:

Angolan portfolio, made of diamond mining �rms holding concession inAngola

Control portfolio, made of diamond mining �rms that do not have interestsin Angola.

Control portfolio is needed to check that the e�ects on the CAR ofAngolan companies are not caused by shocks in the market where theytrade, not captured by the market index rt

M .



Methodology

The impact of a political event is then assessed in two ways:

Plot CARt: a downward (upward) sloping CAR means that the eventhad a negative (positive) impact.

Test the null that the event has no impact.



Data: Sources

The time period considered goes from January 1, 1998 to June 28, 2002,which corresponds to the most intense phase of the con�ict.

Di�erent databases have been crossed for the analysis:

Datastream and Bloomberg for �nancial data

Lexis-Nexis for data on political con�ict.



Data: Angolan companies

Seven diamond companies holding concessions in Angola.

The portfolio is an equally weighted average of them.

Not doing this weighting would essentially limit the analysis to De Beers.



Data: Non-Angolan companies

The control portfolio is a weighted average of forty-two companies thatsatisfy three criteria during the sample period:

1 Listed in one of the markets where the Angolan companies are traded;

2 Continuously traded over the sample period;

3 Not holding exploration or mining concessions in Angola.



Tracking

Ex-ante trends for the two groups are very similar.



Table of Contents

1 Literature Review

2 Study Setting


4 Main Findings

5 Conclusions



Savimbi's death

To test the previous model we consider the stocks' response to Savimbi'sdeath on February 22, 2002.

This event is highly relevant: given that he was seen as the main obstacleto the peace process, the probability of a cease-�re drastically increasedafter his death.



E�ect on the Angolan portfolio

CAR declined 7% three days after the event: investors perceivedSavimbi's death as bad news for Angolan companies.



E�ect on the control portfolio

The abnormal return increased 1.4% on the event date: investorsperceived Savimbi's death as no news or as good news for companies notoperating in Angola.



Signi�cance tests

Signi�cance tests reject both the hypothesis that the CAR of the Angolanportfolio is zero in correspondence to the event and that the CARdi�erence between the two portfolios is zero against the positivealternative.



Peace is bad news

Peace is bad news for Angolan �rms. Why?

Transparency: the end of the war may have generated an increase demandof transparency, reducing rents for �rms.

Increase in competition: potential entry of new �rms.

Rent Seeking: civil war limited government's ability to extract rents;tighter government control is likely to increase �rms' costs for corruption.

End of Price War: UNITA �competitive force� will disappear.



Robustness

In order to reinforce the validity of the obtained results, some robustness checksare conducted.

1 Involvement in con�ict zones



Robustness

2 Corruption

Anticorruption episode (unexpected suspension of Endiama's director) wasperceived as good news for the mining companies with direct interest inthis episode, but not for other companies.



Robustness

3 Alternative Interpretations

O�cial end of the war, on April 4, 2002, gives similar results to thoseobtained for Savimbi's death.

Peace could have generated a fall in diamond prices.



Robustness

4 How di�erent types of events a�ect �rm value?



Robustness

5 Matched Pairs

Match each of the target companies to one control company chosenaccording to the following criteria:

Listed in the same stock exchange;

Closest possible size versus the Angolan company.



Table of Contents

1 Literature Review

2 Study Setting


4 Main Findings

5 Conclusions



Concluding remarks

Peace is a bad news for diamond companies operating in Angola.

Sizeable and statistically signi�cant decrease in the abnormal return of theAngolan portfolio;

The e�ect is not driven by unmeasured shock: the counterfactual (controlportfolio) shows no signi�cant reaction.

Limited external validity.

Small sample: just seven companies in the Angolan portfolio



Policy implications

Policy makers should take into account the following aspects:

Some �rms, not directly related to the war industry, could bene�t from acon�ict environment in resource-dependent economies.

There might be incentives to exert political and economic pressure not tostop the �ght.



Questions and answers


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