diamonds are forever, wars are not: .2cm is conflict bad ... · diamonds are forever, wars are not:...
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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
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Table of Contents
1 Literature Review
2 Study Setting
3 Experimental and Regression Design
4 Main Findings
5 Conclusions
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Table of Contents
1 Literature Review
2 Study Setting
3 Experimental and Regression Design
4 Main Findings
5 Conclusions
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings 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
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Why development economists should focus on civil con�ict?
1 Nowadays civil con�icts are far more common than international con�icts.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Why development economists should focus on civil con�ict?
2 Majority of recent intra-state con�icts happened in the poorest region ofthe world.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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)
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Table of Contents
1 Literature Review
2 Study Setting
3 Experimental and Regression Design
4 Main Findings
5 Conclusions
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings 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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Table of Contents
1 Literature Review
2 Study Setting
3 Experimental and Regression Design
4 Main Findings
5 Conclusions
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings 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
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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 .
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Tracking
Ex-ante trends for the two groups are very similar.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Table of Contents
1 Literature Review
2 Study Setting
3 Experimental and Regression Design
4 Main Findings
5 Conclusions
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings 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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
E�ect on the Angolan portfolio
CAR declined 7% three days after the event: investors perceivedSavimbi's death as bad news for Angolan companies.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Robustness
In order to reinforce the validity of the obtained results, some robustness checksare conducted.
1 Involvement in con�ict zones
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Robustness
4 How di�erent types of events a�ect �rm value?
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Table of Contents
1 Literature Review
2 Study Setting
3 Experimental and Regression Design
4 Main Findings
5 Conclusions
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings 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
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
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.
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi
Literature Review Study Setting Experimental and Regression Design Main Findings Conclusions
Questions and answers
Diamonds Are Forever, Wars Are Not: Is Con�ict Bad for Private Firms? Gualtiero Azzalini, Benedetta Brioschi