Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?

Guidolin, Massimo; La Ferrara, Eliana

doi:10.1257/aer.97.5.1978

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American Economic Review: Vol. 97 No. 5 (December 2007)

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Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?

Article Citation

Guidolin, Massimo, and Eliana La Ferrara. 2007. "Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?." American Economic Review, 97(5): 1978-1993.

DOI: 10.1257/aer.97.5.1978

Abstract

This paper studies the relationship between civil war and the value of firms in a poor, resource-abundant country using microeconomic data for Angola. We focus on diamond mining firms and conduct an event study on the sudden end of the conflict, marked by the death of the rebel movement leader in 2002. We find that the stock market perceived this event as "bad news" rather than "good news" for companies holding concessions in Angola, as their abnormal returns declined by 4 percentage points. The event had no effect on a control portfolio of otherwise similar diamond mining companies. This finding is corroborated by other events and by the adoption of alternative methodologies. We interpret our findings in light of conflict-generated entry barriers, government bargaining power, and transparency in the licensing process. (JEL D74, G32, O13, O17, Q34)

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Authors

Guidolin, Massimo
La Ferrara, Eliana