Tuesday, 19 April 2011

Is anyone surprised by this result?

From a new NBER working paper, Coups, Corporations, and Classified Information by Arindrajit Dube, Ethan Kaplan and Suresh Naidu. NBER Working Paper No. 16952
We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves.There is no effect in the case of the widely publicized, poorly executed Cuban operations, consistent with abnormal returns to coup authorizations reflecting credible private information. We also introduce two new intuitive and easy to implement nonparametric tests that do not rely on asymptotic justifications.
It will come as no surprise to anyone to learn that during the Cold War covert operations conducted by intelligence agencies were a key component of superpower foreign policy. In particular in the case of the U.S., many of these operations were carried out with the expressed goal of replacing "unfriendly" regimes. Such regimes were often ones that had expropriated multinational U.S. based corporate property. These operations were planned under extreme secrecy. Given corporate property was always restored to the multinational after a successful regime change, these operations were potentially profitable to companies which had been nationalised previously.

If foreknowledge of these operations was truly secret, then pre-coup asset prices should not reflect the expected future gains - assuming the coup would be successful. However, what this paper shows is that not only were U.S.-supported coups valuable to partially nationalized multinationals, but also, asset traders arbitraged supposedly "top-secret" information concerning plans to overthrow foreign governments.

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