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The Wages of Sin: Using Event Study Analysis to
Understand Public Opinion and War
Neill A. Mohammad
University of Michigan
August 20, 2010
Abstract
Existing international relations literature suggests that “resolve,” or a state actor’s willing-ness to fight a war, is one of two primary components that determine which party winsduring crisis negotiations. The more willing, or resolved, a state is to fight, the further theycan escalate the confrontation; their less-resolved adversary will reach the limits of theirown willingness to engage first, and thus should be the first to offer concessions, holding therelative power of the two actors constant.
Resolve characterizes both a state’s material ability to pay for a war as well as thecitizenry’s interest in doing so. When citizens–voters–are more amenable to supporting awar effort, their democratic government ought to have a stronger hand in a given crisis, andwill press further before blinking. However, behavioral research tells us that public opinionitself is significantly influenced by elite rhetoric and messaging. This suggests that democraticleaders should attempt to influence public opinion in order to increase resolve against a rivaland thus win the dispute. I call this influence “information market intervention,” and developit separately in a formal model. Here, I use an event-studies estimation to distinguish theamount of information market intervention associated with a series of international disputesinvolving the United States between 1981 and 2002.1
1Prepared for the 2010 Annual Meeting of the American Political Science Association in Washington,D.C. I am indebted to Andrew Kerner, Jim Morrow, Allan Stam and participants in the Inter-disciplinaryWorkshop in American Politics at Michigan (4/2/2010) for helpful guidance and feedback.
1 Introduction
“We must be the great arsenal of democracy. For us this is anemergency as serious as war itself. We must apply ourselves to ourtask with the same resolution, the same sense of urgency, the samespirit of patriotism and sacrifice as we would show were we at war.”
Franklin D. Roosevelt, December 29, 1940.
The “arsenal of democracy” was meant to describe both the destroyers–for–bases swap
with Great Britain, concluded on September 2nd of that year, and the forthcoming Lend–
Lease Program, which would be completed on March 11th, 1941, as measures that would
keep the United States out of an European war by equipping the British to win the fight
on their own. We know now, however, that the US was already engaged in what would be
known as the Battle of the Atlantic by 1939, when Roosevelt ordered Navy and Coast Guard
patrols to broadcast the positions of any suspicious craft in “plain English” and to trail such
ships as long as possible while maintaining the broadcast (Bailey and Ryan 1979). The US
Navy, in other words, was acting as an auxiliary of the Royal Navy a bit more than two
years before officially entering the war. This was notionally meant to police the US’s “zone
of exclusion” from the various European belligerents. If the British, sailing American-built
destroyers, ended up sinking or capturing Axis ships after hearing an unencrypted, English-
language report broadcast by the American navy, then—according to Roosevelt—that would
be a regrettable but nonetheless unavoidable consequence of America defending its neutrality
against foreign aggression.
Roosevelt’s reluctance to ask Congress for a formal declaration of war until after the
attack at Pearl Harbor is typically described as a product of the shackles of isolationism,
both in the Capitol and the nation more widely. Nonetheless, even the Neutrality Acts of
1936, 1937 and 1939 were not enough to prevent the US from not only arming the British,
first under the “cash-and-carry” principle and then later, when Britain no longer had the
merchant shipping capacity necessary to “carry” much of anything, by transporting the
goods and material themselves. Ultimately, America provided her own armed escorts for
supply convoys across the Atlantic. In April 1941, the American destroyer Niblack opened
fire at what her crew thought was a U-boat sonar signature. In September, the Greer fired
on another U-boat after taking torpedo fire from an unidentified craft. It is unsurprising,
then, that by Autumn 1941 Americans overwhelmingly believed that they were already at
war for all intents and purposes (Gallup and Fortune Polls N.d.). The Republican Party’s
1
isolationist platform had found its limits long before the “day that would live in infamy.”
The growing involvement of the US Navy in the convoy business was in fact broadly
supported by the public, which had also come to view Hitler as a serious threat to US
security by 1941. Certainly no small part of this change in opinion was a reaction to events
as they unfolded, as Germany conquered Poland, Norway, the Low Countries and France
and then invaded the Soviet Union. However, Roosevelt was not content to let Americans
reach just any conclusion of their own choosing regarding which side, if any, the United
States should favor. In his Navy Day address in October 1941, Roosevelt claimed to have a
copy of German plans for partitioning South America (which, in retrospect, may well have
been a British forgery) as well as the liturgy of an “International Nazi Church” that would
replace Christianity after an Axis victory. He also reassured a pool reporter during a weekly
press conference after the start of Operation Barbarossa that the Soviet Union was actually
quite liberal when it came to matters of religious expression and thus, by extension, a worthy
would-be ally should the US enter the war.2 By hook or by crook, American opinion was
solidly behind a prospective war effort even before December 7, 1941 and remained so until
the final victory in 1945 (Berinsky 2007).
Extant theory in world politics captures the expected utility to a state of going to war as a
lottery in which the state stands some probability of winning, some probability of losing, and
pays some cost to enter the lottery in the first place. Such models propose a utility function
for each party to a dispute, commonly reduced to the heads of government for either side, of
the form EUwar = Prwin(Uwinning) + Prlose(Ulosing) − c. This last term, c, characterizes the
leader’s or state’s resolve, and describes both the loss of military assets and wealth during
the war, as well as the state’s more general interest in the issue or the good under dispute in
a particular conflict (Fearon 1995). Larger values of c denote less-resolved actors, as paying
a higher cost term means that their overall utility derived from war will be lower; lower
values of c describe their more-resolved counterparts. Even in the face of an overwhelming
probability of loss, a state may nonetheless choose to fight on because the cost of losing is
relatively small in material terms, or because they are exceptionally invested in the issue.
Both of these conditions might make a state—without yet making any assertions about
political behavior—resolved. North Vietnam was willing to fight against the U.S. despite
long odds of winning and the high cost of resistance because of the perceived seriousness of
2To be fair, this required much less prevarication than one might guess. The 1936 Soviet Constitution wasamong the world’s most progressive, as it provided for universal suffrage, direct elections and improved rightsfor women in addition to religious freedoms and a host of other advances. That Stalin had just murderedmore than a million people in the Great Purge was, at least grammatically, a small omission.
2
the cause; the U.S. was willing to fight against Grenada despite attaching little importance
to the stakes because the probability of winning was almost certain and the cost of doing so
almost nil.
In the example above, Roosevelt was clearly in the business of increasing Americans’ ap-
petite for war. Rearmament and increased defense spending—increasing p, the probability
of winning—was not sufficient because, as a practical matter, no one will fight a war only
because they think they can win. War is, after all, the “pursuit of politics by other means,”
and meant as an means to some political end. To achieve such ends leaders need to secure
some level of public support, driving down c and potentially exacting a more favorable out-
come in pre-war negotiations. Public opinion may indeed restrain political decision makers,
but this example suggests that, sometimes, leaders are able to loosen the bonds of their own
restraints.
In this paper, I argue that international security research that relies on democratic voters
to coerce their leaders into certain modes of behavior ought to be viewed in a more critical
light. In particular, the ability of democratic leaders to cue or persuade voters of certain
positions over others extends to the international sphere, and this would suggest that popu-
lar restraint is not always as powerful a deterrent as is frequently assumed by international
relations scholars. After a brief literature meant to draw out the connection between interna-
tional relations research and behavioral research in American politics, I define “information
market intervention” as the ability of leaders to attempt to convince voters of the wisdom
of taking a more hawkish position relative to an international rival than might have been
the case otherwise. Since earlier empirical work on the relationship between public opinion
and elite behavior during times of international crisis suffers from measurement error, I rely
on the event study framework developed in financial economics to attempt to identify which
crises from the American context are most or least likely to have been associated with in-
formation market intervention. I test this technique against the equity pricing of ten large
American defense contractors and a set of 9 crisis events, as defined by the International
Crisis Behavior data, involving the United States between 1981 and 2002. I find suggestive
evidence in that the only crisis onset events that were seen as “news” by the financial markets
were the Iraq’s 1990 invasion of Kuwait and the terrorist attacks of September 11th, 2001.
3
2 Literature Review: Democracies and International
Crisis Behavior
Research into the the effect that a state’s regime type has on its international security
behavior was predicated on the democratic peace proposition. Empiricists were largely
responsible for initiating early research into the democratic peace (Babst 1972; Rummel 1975-
1981; Small and Singer 1976), and analysis of the data outpaced theoretical considerations.
The bulk of modern treatments of the subject can be traced to Michael Doyle (1986), who
asserted that the Immanuel Kant’s “separate republican peace” (Kant 1970a,b) was the
logical wellspring of then-President Reagan’s goal of spreading democracy abroad as well as
the empirical regularity.
Although there are multiple explanations for the democratic peace in the current lit-
erature, the most powerful link domestic political institutions with the formation of elite
preferences. Fearon (1994b) argued that leaders’ desire to stay in office means that they
must avoid backing down on public commitments. Democratic leaders’ decisions to escalate
by means of direct military action or the issuing of public appeals—tempered by their in-
centive to defend their reliability and reputation—sends a more accurate signal of resolve
than similar acts by autocratic leaders. By this logic, democratic states should have greater
bargaining power in escalating crises and be more likely to settle them on favorable terms,
even if they are at a disadvantage in relatively minor disputes in which they cannot credibly
claim a large investment. Stated differently, democracies’ bargaining positions will be more
closely tied to their true preferences, and since that motivation is common knowledge among
all bargainers this implies that they will be more likely to get a deal as least as good as their
reservation point with the drawback that they will be less likely to extract surpluses beyond
that reservation point.
This is explored in greater detail by Bueno de Mesquita and Lalman (1992) and later
Bueno de Mesquita et al. (2003), who examine the domestic political incentives of leaders
who, at the mercy of the reputational game described by Fearon, assign differing values to
the procurement of public versus private goods based on selection institutions. Bueno de
Mesquita et al. observe that democratic leaders should be more selective about entering
crises and conflicts and less speculative in carrying them out, since any gamble with public
goods allocation is likely to be politically damaging. Dictators, at least in the short-term,
are privileged in their ability to make up for policy failure with private goods allocated to
a small retinue of support. In the two-sided bargaining game between a pair of democratic
4
states who both face this set of incentives, both sides’ signals are more informative and they
can thereby avoid war in equilibrium. Schultz (2001) also leverages Fearon’s audience cost
concept (Fearon 1994a) but focuses on the role that party competition plays in eliminating
the executive’s incentives to bluff. This has similar implications for negotiations between
democracies, forcing leaders to negotiate more conservatively and hew closer to their reser-
vation point in anticipation of electoral punishment for more risky strategies.
The common observation running through the above literature is that voters serve as
a source of restraint on leaders’ decision making during crises. The prospect of electoral
punishment circumscribes the options available to democratic leaders. This punishment
would logically require that voters are able to evaluate foreign policy and impose rewards or
punishment at the ballot box accordingly. This is necessarily the case whether the domestic
political process is explicitly modeled (Slantchev 2006) or abstracted away as a parameter
in the leader’s utility function.
3 Literature Review: Public Opinion, Foreign Policy
and the Privileged Role of the Executive
Voting behavior is crucial for the theories described above but curiously absent from
most of them. Results from the American subfield suggest that this is because modeling
voter behavior is rather difficult. In their pioneering American Voter, Campbell et al. (1960)
suggested that the American public was rarely informed about issues and could not make
connections between the issues and the major parties’ positions, or even identify their own
most preferred policy when prompted.3 This “Almond-Verba consensus” (Aldrich et al. 2006)
was of course challenged in the subsequent decades. Public opinion researchers eventually
discovered that much of the response instability that Almond, Verba, Converse and others
had derided was in fact partly generated by the survey instruments used by researchers of the
time. Better-designed surveys showed that voters did in fact evaluate policies and politicians
in a somewhat consistent, intellectually defensible way after all—or that they at least try,
and try at least some of the time (Page and Shapiro 1992).
Zaller (1992) used this insight to construct a model of public opinion in which mass
publics, while at the mercy of elite-driven discourse and associated behaviors such as framing
and priming,4 as well as gatekeeping its factual content, incorporate information from their
3It should be noted that American Voter was, itself, strongly informed by a few other works, bothcontemporary (e.g. Davis and Verba (1960)) and traditional (e.g. Lippmann (1950)).
4Framing shapes the affective impact of information by changing the focus and construction of newsstories, while priming changes affective impact by subliminally provoking emotional recall in subjects. On
5
environments in an identifiable manner. However, the information that ultimately reaches
the public is narrowly-selected and potentially biased, which limits voters’ ability to fulfill
their roles as evaluators. Any number of discrete attitudes on a subject may be expressed
by an individual, depending on what stimuli they are presented with.
These accounts are elite-centered, and assert that politicians, journalists, activists and
other specialists play a critical role in shaping information’s impact on individuals and there-
fore its implications for voting decisions. Such influence can be realized either by shaping
evaluations of a given issue, or by attempting to increase or a reduce a given issue’s salience
in the electorate.5 With respect to foreign policy and security affairs, conventional wisdom
would suggest that some kinds of information are easier to come by than others. Milstein
(1973), but more famously Mueller (1973) traced the erosion of support for American in-
volvement in Vietnam over time to distaste for mounting casualty figures, based on a pattern
found in public approval during the Korean War. Mueller, in particular, figured that casual-
ties were an accurate estimate of the cost of prosecuting the war as well as an easily-accessed
measure that did not demand costly research from voters.6 This may overstate the case—if it
were the case that the American public were as casualty-sensitive as Mueller’s model would
suggest, one might wonder why the military is ever deployed at all. Gelpi, Feaver and Rei-
fler (2006) revise Mueller’s argument to emphasize an interactive effect between individual
assessments of whether war was the correct policy choice and whether the U.S. is likely to
win. In this latter case, voters might support military operations that result in casualties as
long as they can be convinced that the losses are for a good cause.
Focusing on affective, rather than objective, information, Adam Berinsky finds that dis-
approval of the Vietnam War depended not only on voters’ assessments of the war’s costs
and benefits, but also cues from elites that signaled whether or not disapproval itself was
legitimate. In the absence of elite-defined legitimacy, voters with doveish attitudes claimed
to have no opinion on the war when surveyed (Berinsky 2004). While voters might indeed
evaluate policy performance in war with facts in mind, such discursive trends seem to have
either added or dropped voters from expressed public opinion wholesale. If public opinion
elite-driven framing see Druckman (2001); on agenda-setting or gatekeeping, see Iyengar and Kinder (1987).5In other words, there appear to be four conditions under which an issue might factor into an individual
voter’s decision, aligning themselves in a 2x2 matrix. One dimension captures whether a voter’s evaluationof a policy is positive or negative; the second dimension captures whether or not they care.
6Of course, such a yardstick is easily conflated: mounting casualties could reflect both a revelation ofhigher-than-expected costs or lower-than-expected chances of winning the conflict. These two factors areconceptually distinct despite their typical correlation, as noted earlier. On war exhaustion in democraciesand conflict duration, see Slantchev (2004)
6
can be thought of as a revelation, or snapshot, of voter preferences, that swathes of eligible
voters are led to “drop out” of the prevailing debate would have serious implications for how
and whether leaders are evaluated on their foreign policy performance. The median respon-
dent in such a truncated sample is likely to be quite different than the “true” median voter
in the population, meaning that leadership will be judged by different median voters that
are determined by an at least partly-exogenous process. Shapiro and Jacobs, on a related
note, find that the American president’s ability to lead public opinion on foreign policy has
grown, and his responsiveness to public outcry shrunk, with the end of the Cold War as a
constraining frame (Shapiro and Jacobs 2000).
4 Information Market Intervention
“Joker, I’ve told you, we run two basic stories here. Grunts who givehalf their pay to buy gooks toothbrushes and deodorants–Winningof Hearts and Minds–okay? And combat action that results in akill–Winning the War. Now you must have seen blood trails... dragmarks?”
Lt. Lockhart, Full Metal Jacket
In short, voters evaluate political success or failure in the face of appeals by elites, many
of whom are the same officials who carried out the policy in question. In policy-making
circles, outreach meant to convince masses of the wisdom of certain elites over others is
referred to as “public diplomacy.” The American State Department maintains a series of
programs throughout the world to support broader American ideological goals; although
it is now outside the State Department’s purview, a helpful example would be Radio Free
Europe/Radio Liberty. Elsewhere, the Public Affairs Mission at the American embassy in
Kabul is explicitly tasked with out-competing radicalized news sources associated with the
Taliban and like-minded groups, under the premise that the Afghan public would be more
supportive of the NATO mission there if pro-Western narratives were more readily available.
The same tools can be aimed inward as well. Public diplomacy conducted by illiberal
regimes toward their own mass audiences is usually referred to as propaganda, but propa-
ganda is not the sole purview of non-democracies. In 2008, an investigation into the Defense
Department’s media outreach program led to the revelation that the Pentagon had paid
retired officers to work as pundits for broadcast news programs, and had done so for several
years (Barstow 2008). That their evaluations tended to be supportive of government policy
7
and hawkish on the need to continue the mission in Iraq should not come as a surprise.7 If
we rely on models in which wars are cases of bargaining failure, then measures to increase the
public’s willingness to endure the costs of even a hypothetical conflict are not only attractive
but necessary.
Information markets8 are a helpful metaphor for understanding the general puzzle. On
the whole, public opinion researchers have reached a rough consensus that expressed opinions
are some combination of core values, or dispositions, toward a set of topics, and the response,
or attitude, provoked by the way in which a certain issue is raised or in which it is asked
about in the context of a survey or interview (Zaller 1992). When individuals go about
their lives outside the context of a survey or experiment, the stimuli that produce expressed
political attitudes come from either consumption of mass media or from friends, neighbors,
family and colleagues. This set of possible stimuli is, effectively a marketplace of information.
Consumers adopt some, but not all, of the ideas and beliefs confronting them. Producers in
this competitive market are left with the same options they would have anywhere else: to
compete either by making their products more appealing or simply more numerous than the
competition.
Here, I focus my attention on intervention in the information market for an individual
foreign security crisis. Changes in the information market—the amount of information avail-
able about the crisis as well as the types of information it contains—should produce changes
in how policies are evaluated, and will either strengthen or weaken popular support for the
government. There are two distinct ways of describing the value of information market
intervention to a government. The simpler of the two is that by intervening in the infor-
mation market, the government might avoid being held accountable for failure. Given that
even apologists for voters’ interest in foreign policy, who claim that efficient voting behavior
implies only paying attention during crises (Shapiro and Jacobs 2000), admit that foreign
policy enjoys less salience than other issues, leaders might rationally expect that a publicized
failure might carry more weight with the public as compared to a number of less-well-known
successes. In other words, leaders might fear post hoc retrospective voting that has a par-
ticularly short time horizon. This logic is adopted by Baum (2002), who exams crises in
7To put an even finer point on it: one of the emails turned over to the NYT during their investigationwas written by a Col. James Garrett, asking his contact at the Defense Dept. to please “let me know if youhave any specific points you want covered or would prefer to downplay” during his scheduled appearance onFox News.
8The term “information market” implies the free provision of thoughts and ideas among a polity suchthat the best rise to the top; the term was most famously used by Milton in the Areopagitica (1644), whodescribed a “marketplace of ideas” as essential for liberal government.
8
which the American president evidently rejected the opportunity to generate audience costs
by failing to “go public” in a dispute.
The second reason recalls our earlier discussion of international resolve. Information
market intervention increases resolve, and increased resolve credibly increases one’s demands,
and the adversary’s offers, in pre-war bargaining. Additionally, a state’s power is constant
over the course of a war in all but the most protracted cases, which is why p, the probability
of either side winning, is treated as exogenous (and, frequently, common knowledge) in the
modeling literature (Powell 1999). Any further armament will only change the military
balance if accomplished before the shooting starts (Morrow 1993). Resolve, then—both
within the government and the population at large—is the primary point of distinction
between different states’ interest in fighting and in their ability to demand a better offer to
avoid hostilities. Mutual private information about resolve is the key culprit in explaining
why wars ever happen at all.9 This additional resolve, generated by the government as an
instrument for diplomacy, will then yield some greater ability to demand concessions from a
rival given that their expected costs of war10 would now be smaller.
This builds on Fearon’s original audience cost model in a few ways. One is to note that
the decision of whether or not to engage in the sort of public appeal that generates audience
costs has both strategic value (per Fearon’s model) and is dependent on leaders’ political
considerations. The second would be to simply point out that the evaluative framework
that we associate with audience costs, while seemingly robust in direct examinations (Tomz
2007), is nonetheless conditional on the existence of affective appeals. In other words, elite
messaging might change the dimension on which a leader’s effectiveness is judged. Mass
publics are expected to impose audience costs on their leaders because they place some value
on national honor and reputation (Tomz 2007); if political appeals can cushion the blow of
any loss of reputation, or change the dimension on which success or failure is measured, then
the coercive power of audience costs will be blunted.
In descriptive terms, intervention can take multiple forms. It might prevent the discovery
of a crisis in the first place. This would include the United States’ Atlantic campaign prior
to World War II as well as its advisory operations in Vietnam prior to 1960. It was also
true of the Allied intervention on behalf of the Tsarists in the final gasps of the Russian
9In the context of formal modeling, whether or not a state is“resolved” is typically used to define whetheror not it will choose to escalate further / fight, rather than capitulate, at its last opportunity to make adecision; see for example Morrow (1994)
10Operationalizing the costs of war as some combination of material costs (money, men, equipment) andpsychological costs (national morale, popularity of the government) is a common crutch in the modelingliterature; see Powell (1999) and Fearon (1995)
9
Revolution. Intervention may also describe attempts to justify, sell or spin security policy
related to a crisis whose existence is public. Once the United States’ adventures in the
Atlantic came to light, Roosevelt was candid in admitting them but did his best to sell both
their necessity for continued neutrality while at the same time—and sometimes in the very
next sentence—underlining or even manufacturing rationales for going to war.
Importantly, we should note that while intervention may have sinister overtones, it need
not be solely associated with wars that prove unnecessary or otherwise ethically problematic.
More effective information market intervention by Roosevelt in 1936, for example, might
have given Britain and France the confidence to evict German troops from the Rhineland
and changed the course of the later war, or even avoided it entirely.
5 An Empirical Puzzle and its Inferential Dilemma
5.1 The Nature of Current Research
The extent of public support for the president in a crisis is revealed at least in part by
their increased job approval at the crisis’ outset. This effect was first described as the
“rally-round-the-flag” effect, which Mueller (1973) found by comparing the magnitude and
durability of popular support for the Korean and Vietnam Wars. Presidential approval
jumped initially, and then trailed off both as subsequent events depressed public enthusiasm
for the conflict and as other issues competed for voters’ attention. Mueller theorized that
this was the product of a swell of patriotic sympathy that accompanied the deployment of
troops, particularly abroad, with politics stopping at the water’s edge. Later research has
provided a number of plausible interpretations for this behavior. Norms against political
criticism during times in crisis (Groeling and Baum 2008) might deter war critics, both
among elites and among masses who find themselves sampled by public opinion polls, leading
to an increase in approval; the media’s short-lived dependence on the government in its
reporting (Bennett, Lawrence and Livingston 2006) might mean that pro-war narratives
are more common and easily consumed; the extent to which partisan domestic divisions are
exacerbated by a particular conflict might deepen or weaken expressed rallies; the ideological
identification of a particular rival in the electorate may make rallies especially pronounced
James and Rioux (1998); or the perceived legitimacy of such a dispute, as signaled by a third
party, might cause voters to either reject or endorse their government during a particular
crisis (Chapman and Reiter 2004).
10
While I argue that existing explanations linking public opinion and security are unsatis-
fying precisely because they discount both the endogeneity of rallies to the dispute itself and
to whatever other domestic political forces are operating at the time, it might be the case
that observed variation in rallies could be a promising way of operationalizing my theory of
information market intervention. Intervention, after all, is meant to increase political sup-
port because it strengthen’s one hand during a dispute, and the literature has interpreted
the rally effect as a burst of public support for their government when faced with an interna-
tional crisis. We might reasonably expect that intervention might produce larger rallies, or
at least produce larger (or more durable) responses in the relevant audience when successful.
And since public support helps leaders win better settlements without going to war, the
prospective likelihood of a rally should influence the decision to escalate in a given crisis, or,
if the initiator of a dispute is democratic, to start the crisis at all.
However, the empirical estimation of rally effects has been problematic. Most analyses
in this vein match some sources of public opinion data against the crises identified by one of
the major international dispute data. Even when focusing on a single country, such as the
United States, polling data is not readily available that is actually tailored to any particular
dispute. Some disputes are so minor that they never achieve the sort of salience necessary
for inclusion in any poll, and even when they do they are only included once the crisis has
begun to unfold, which makes a proper measurement of any change in the public pre- and
post-crisis impossible. Other, more nuanced questions are only asked in panels such as the
ANES, which of course will not be useful for a single given dispute unless it happens to
drag on for at least two years. For those reasons, most studies, including those by Chapman
and Reiter (2004) and Groeling and Baum (2008), rely on presidential job approval as a
workhorse dependent variable. Job approval is the only consistently available measure that
can be interpreted as a plausible measure of foreign policy sentiment.
There is a critical weakness in taking this approach, however, which becomes clear upon
closer inspection. The average magnitude of rallies found by Chapman and Reiter, for
example, is only 0.401 percentage points, and when excluding the 33-point rally after the
9/11 attacks, the mean falls to 0.241. Selection logic might have implied that the average
rally ought to be positive, with leadership avoiding the onset of crises in which the public
fails to line up behind the government, since these would be the cases in which audience
costs would be most likely to eject them from office. Inspection of individual cases lays
the issue more bare. In the same study, the authors include a 16-point drop in presidential
approval rating connected to a MID between the US and Canada on September 14th, 1974,
11
which was originally included by Baker and Oneal (2001). The MID in this case is derived
from11 a fairly vague wire report that five Canadian ships were detained by the US for
illegal fishing and then released the next day for $5,000 in bond each. It is possible that
the American public was particularly outraged by this development, and angry enough that
they punished Ford with the largest single backlash in the post-war period for any event in
the MID dataset, including the Bay of Pigs disaster.12 However, it is also possible that the
public was reacting to something else that happened that same week: on September 8th,
1974, Ford issued a blanket pardon for Richard Nixon. Since work in this vein almost always
relies on few observations, the prospect that so much left-hand variance would appear to
have little to do with the data generating process of interest ought to be of concern.
Crisis Date Opponent Crisis Description Pre-Poll Date Post-Poll Date Rally9/15/01 Afghanistan 9/11 Attacks 8/16/01 9/21/01 +331/16/91 Iraq Gulf War 1/11/91 1/17/91 +189/14/74 Canada Fishing dispute 9/6/74 9/27/74 -16
10/29/62 Peru Fishing dispute 10/19/62 11/16/62 +1312/7/41 Japan Pearl Harbor 11/12/41 1/8/1942 +12
10/22/62 Cuba Cuban Missile Crisis 9/20/1962 11/16/62 +115/14/75 Cambodia Seizure of the Mayaguez 5/2/1975 5/30/1975 +11
12/17/59 Dom. Republic. Transport forced down 12/10/59 1/6/1960 -115/12/81 USSR USSR airliner seized 5/8/1981 6/5/1981 -96/28/50 North Korea Korean War 6/1/1950 7/1/1950 +9
12/11/89 Canada Fishing dispute 12/7/89 1/4/1990 +912/19/89 Panama U.S. invasion of Panama 12/7/1989 1/4/1990 +9
Table 1: 12 largest rally episodes as reported by Chapman and Reiter (2004). Fishingdisputes or other essentially civilian episodes listed in italics.
6 Research Design, Data and Method
6.1 Discussion of Event-Studies Estimation and Research Design
Although rallies, as they have come to be described in the literature, might be related to the
information intervention theory I describe here, they do not map on to available sources of
11Unfortunately, narrative documentation on both the MID and proper COW war data are thin, andmostly non-existent for MID 2.0 and earlier. The only supporting documentation on the Canadian fishingdispute is the note “New York Times” in the file at http://www.correlatesofwar.org/COWData/MIDs/
MID2.1_SpecificSources.csv.12Which, in what still comes as a surprise to me, actually saw a +5 point bump to President Kennedy by
this measure.
12
public opinion data. The one available measure of rally magnitude or duration, presidential
job approval, is too easily conflated with other political events. Owing to the dangers
of relying on changes in presidential job approval as a measure of the public’s response
to information market intervention, I adopt an event study from a growing literature in
financial economics. Event studies have been most commonly used to measure the impact of
various bits of news, such as earnings statements or dividends announcements on the financial
performance of individual firms (Fama et al. 1969; Ball and Brown 1968; MacKinlay 1997).
More recently, economists and political scientists have used the same approach to measure the
impact that of political news using market reactions. This has run the gamut from the effect
of CIA-sponsored coups in Latin America (Dube, Kaplan and Naidu Forthcoming), to the
profit from civil conflict that accures to diamond-mining firms (Guidolin and Ferrara 2007),
to the volume of arms trade impacted by UN embargo (DellaVigna and Ferrara 2007). Among
political scientists, Bernhard and LeBlang (2006) explore a number of different applications in
which uncertain political developments, such as cabinet formations and dissolutions, produce
financial consequences in equity and currency markets.
I argue that the presence of information market intervention should be reflected in the
stock performance of the firms that supply arms and equipment to the intervening govern-
ment. This relies on a straightforward argument about the role of information in efficient
markets. In general, traders in a market who buy and sell stocks cannot profit on infor-
mational asymmetries. When something happens to affect demand for a firm’s product,
that information ought to be incorporated into the price for that firm’s shares more or less
instantaneously. Any private information, such as advance notice of an upcoming earnings
statement for a firm, ought to be acted on immediately because any individual trader would
rightly fear someone else moving first and missing out. As other investors watch such activ-
ity, they follow suit, and the market for this particular equity, such as a stock, returns to an
equilibrium. When a democratic government has engaged in information market intervention
prior to a dispute becoming knowledge, then the dispute itself will not come as news to the
wider market, either because, in the overt case (promulgating a case for war), observers will
have witnessed pro-war rhetoric and adjusted expectations accordingly over time, or in the
covert case (“going private” and preventing the public from observing the dispute to begin
with) it will not have been observed at all. By contrast, non-intervened cases should see a
spike in the performance of affected firms, because the public will have observed the onset
of the dispute but without prior conditioning. Without the use of intervention, the increase
in the probability of war produced by the onset of a dispute will provide a positive shock to
13
the stock price of defense contractors, since that carries with it a higher expected value for
those firms’ future performance. A higher expected value of future revenue for defense firms
necessarily means that their share price—the net present value of future dividend streams—
ought to climb. In the case with intervention, any such change will have been smoothed over
a longer period of time.13
H1: Information market intervention will reduce the informational impact, as measured
by an event-study, of international crisis episodes.
Of course, this says nothing about what sorts of crises ought to be more conducive to
intervention than others. Separately, I use a formal model to argue that intervention is more
likely when facing a stronger adversary, when facing a more easily-influenced media environ-
ment, when initiating the dispute, and when the electoral penalty to being caught intervening
is smaller. Taken as independent factors, these each function in fairly straightforward ways.
I detail the sampling strategy used here below, which attempts to cull cases that fit each of
several possible combinations of preconditions; in particular, I focus on the strength of the
adversary as the primary point of contention between cases. When facing an exceptionally
weak rival abroad, no government will run even the remote risk of intervention backfiring and
the attendant audience costs-based punishment, because the extra resolve that intervention
provides will not be decisive in determining who wins the crisis negotiation.
As an illustrative example, we can consider the cases of the 1990 Gulf War and 2003 Iraq
War. While both initial disputes produced wars between the same principal belligerents,
they differ in one critical respects: which side (Iraq in the former, the U.S. in the latter)
is coded as having started the crisis, and as a consequence whether there were any public
appeals made before the outbreak of conflict. The build-up to war in the latter case lasted
for the better part of a year, and indeed may have begun even before the September 12th,
2002 date identified by ICB. This distinction is reflected in simple charts of the abnormal
returns to three defense contractors around the trigger date of either crisis. As they reacted
to the surprise of a crisis onset, abnormal returns jump in unison on August 2nd, 1990. By
comparison, the abnormal returns associated with these firms in September 2002 are quite
a bit more noisy, which reflects that the potential for a conflict had already been observed
by the market.
13Indeed, public diplomacy campaigns might quite long in the making. One could make the argumentthat intervention prior to the Iraq War stretched back to, say, the founding of Project for the New AmericanCentury in 1997.
14
Figure 1: Abnormal Returns for Three Firms, Gulf War
6.2 Estimation
Event studies have two primary components (MacKinlay 1997). First, we define an event of
interest and a window around that event in which we expect stock prices to change. Second,
we calculate a baseline covariance between an individual firm’s equity and some larger market
of reference. Finally, we predict the daily returns of each share during the event window
using the estimation from the baseline period. The difference between the predicted daily
returns and the actual daily returns during the estimation are abnormal returns. If the
cumulative abnormal return over the event window can be distinguished from 0, then we can
plausibly say that the event itself had some effect on the equity’s price.
The estimates themselves are surprisingly simple. The null hypothesis is that there is no
difference in the two periods, meaning that the coefficients estimated in the pre-test period
will produce estimated returns during the event window that are not significantly different
than the true, realized performance during that time. Following MacKinlay (1997), the
model for the baseline period is:
Rit = �i + �iRmt + "it (1)
15
Figure 2: Abnormal Returns for Three Firms, Iraq War
Figure 3: An event-history model. The baseline estimation period runs for � days, endingk1 days before the event. Equity behavior is measured in a window about the event; thelongest possible event window would be k1 + k2 days. The event of interest falls at t0.
16
where Rit is the daily real return for a stock, expressed as a percentage and Rmt is the con-
temporaneous daily return for the wider market. This is an application of the Capital Asset
Pricing Model, or CAPM, which assumes that any arbitrage opportunities are exploited
instantly and that all substitute investment opportunities are accounted for by the market
variable against which the individual equities are compared. The most straightforward weak-
ness of this approach, as outlined by Bernhard and LeBlang (2006)—that the scale for �
will change depending on the market used—is not a concern here because I am not, strictly
speaking, interested in the coefficient estimated as much as I am the residual expressed as
a percentage difference. More challenging is how to deal with the other contemporaneous
investment options that would have been available to traders during the time periods of
interest. The event studies literature has relied on the Arbitrage Pricing Theory model in
response, which include multiple covariates, such as commodities futures or exchange rates.
However, since even the largest American defense firms belong to dissimilar economic sectors
(a point I will return to shortly), it would be difficult to know what the correct additional
factors to include would be, as Bernhard and Leblang identify. For that reason, I restrict
myself to the CAPM model. I rely on the New York Stock Exchange composite as the market
variable.
The abnormal return—the return to a stock during the event window that is not explained
by the relationship between the firm and the market as estimated in the baseline period—is
given by:
ARi� = Ri� − �̂i − �̂iRm� (2)
The dependent variable is the average abnormal return over the event window, which
represents the average effect of the event (or, more precisely, the effect of the information
provided by the event, which is observed by investors) on the equity of any particular firm.
I estimate the abnormal returns for each of several large American defense contractors sur-
rounding a series of dispute involving the United States. The estimation period is forty
trading days, or roughly two calendar months, ending a month before each dispute observa-
tion. Although a longer estimation period would provide a better fit between the estimation
and event windows and possibly a more robust estimation, longer periods also run a greater
risk of overlapping with a previous crisis event. Since the crisis events are public knowledge,
I expect that any such abnormal returns would be realized quickly. I specify a two day event
window, which includes the date on which the crisis began and the following day.14 The
14Non-trading days, such as holidays, are dropped from my dataset. When a crisis falls on a weekend or
17
particulars of the data selection process are described in the two following sections.
Testing for statistical significance is a different matter entirely. As Guidolin and Ferrara
(2007) point out, daily stock price data are heteroskedastic with non-normal returns even
after correcting for non-constant variance. Furthermore, when aggregating the effect of
an event across individual assets or firms, there will be cross-correlation between them in
relation to any particular event. And finally, useful estimation and event windows are not
likely to be long enough to satisfy large-sample conditions for the convergence of traditional
tests. Corrado and Zivney (1992) find that t-tests to compare the means in the estimation
and event windows over-reject the null, which was corroborated by Campbell and Wesley
(N.d.). As such, I follow Guidolin and La Ferrara’s decision to rely on a non-parametric test
first identified by Corrado and Zivney (1992) for use with event studies using daily stock
data and short estimation windows. The “rank test” constructs a ranking for each firm of all
observations of an abnormal return, across both the estimation and event windows. When
an event has in fact produced some effect on a firm, then the average rank in the event
window will be significantly different than the expected value of any period’s rank ex ante,
which is simply the average rank �+k+12
. With multiple event days, the test statistic is:
∑ni=1[
1k+1
∑t0+kj=t0−k(�ij −
�+k+12
)]√�+k+1
2
∑t0+kj=t0−� [
∑ni=1(�ij −
�+k+12
)]2(3)
where k is the number of additional event window days after the day of the event, � is the
number of the days in the estimation window, n is the number of firms in the sample, and
� is the rank of each abnormal return observation across both windows. The rank statistic
has the additional virtue of producing easy-to-interpret results. It produces a z-score of the
difference in means of the estimation and event windows; in the results below, I report both
the test statistic value, and one- and two-tailed p-values.
6.3 Selection of Firms
Owing to the size of the American defense industry, there are any number of firms to choose
from whose equity pricing could conceivably move in response to American conflict events. I
relied first on the Federal Procurement Data System15 to determine the total amount spent
holiday, I code it as having occurred on the next available trading day.15http://www.fpds.gov.
18
by the U.S. Department of Defense from its contractors at five year intervals in FY 1990,
1995 and 2000.16 I compared these figures to firms’ own arms sales figures as listed in the
“Top 100” report compiled by the SIPRI yearbook series17 for the same three years, which
also reports what percentage of firms’ own sales came from military contracts.
Table 2 lists the firms in my sample. Aside from concentrating on large, publicly-traded
firms, there were a few other sampling issues to consider. First, I attempted to choose
firms that would cover as many categories of military goods as possible, as categorized
by SIPRI. Second, I attempted to include a few companies that have exceptionally large
civilian operations in addition to their military contracting business, such as Boeing and
General Electric, to provide an additional benchmark for detecting the effect of the onset
of a dispute; I expect that these firms will experience smaller shocks, if any shocks at all,
because any elevated probability of future arms sales will make for a relatively smaller fraction
of future revenue. Third, only firms for which closing prices and trading volumes were
available for the entire period containing the conflict sample were considered. Depending
on how certain mergers between defense firms were handled, this means that some qualify
but not others. Prominently, because the Northrop-Grumman merger was structured as an
acquisition, the combined firm has equity information that can be computed as a weighted
average of Northrop and Grumman individually. By contrast, the merger of Marietta-Martin
and Lockheed created an entirely new firm, for which earlier financial performance is not
readily available.
All price, volume and market performance information is taken from Datastream, which
is the standard source of such information in financial economics and business research (Ltd
2010). With only a few exceptions, Datastream only tracks equity information as far back
as 1973, which serves to limit the list of potential conflict events, as I describe below.
One other point is to consider more carefully how the likelihood of conflict would improve
earnings estimates for any particular defense vendor. A quick examination shows that, by
total sales, producers of sophisticated electronics, satellites and other such equipment are
among the largest firms by total sales. However, this is somewhat misleading—they all
achieve these sales by selling small numbers of very expensive items that are not likely to be
damaged in fighting or need to be replaced. Remembering that in an efficient market the
share value of a firm should equal the risk-adjusted net present value of future dividends, the
16Although the FPDS website can produce contractor reports as far back as FY 1978, I found that for theyears before 1990, more than 95% of spending was attributed to “Unknown,” or was listed as classified. Thegovernment’s fiscal year begins October 1st.
17SIPRI, the Stockholm International Peace Research Institute, began compiling this list in 1989.
19
1990
1995
2000
Fir
ms
SIP
RI
Ran
kT
otal
Arm
sS
ales
Tot
al
DoD
Sal
es
Arm
sS
ale
s%
SIP
RI
Ran
kT
ota
lA
rms
Sale
s
Tota
lD
oD
Sale
s
Arm
sS
ale
s%
SIP
RI
Ran
kT
ota
lA
rms
Sale
s
Tota
lD
oD
Sale
s
Arm
sS
ale
s%
Boei
ng
96,
681
1,72
218%
84,7
46
2,1
97
22%
21,6
90
3,5
79
33%
Gen
eral
Dyn
amic
s2
10,8
734,
411
82%
15
3,3
11
1,4
70
96%
66,5
20
1,9
76
63%
Gen
eral
Ele
ctri
c6
8,45
03,
813
11%
26
1,9
21
2,1
78
2%
20
1,6
00
1,4
92
1%
Nor
thro
pG
rum
man
49,
956
2,46
380%
66,4
41
1,7
47
84%
56,6
60
2,4
05
87%
Ray
theo
n7
7,20
52,
688
57%
10
4,4
75
1,8
66
34%
410,1
00
6,6
87
60%
Tex
tron
292,
489
520
24%
29
1,8
08
837
16%
27
1,2
00
1,0
80
9%
Un
isys
272,
620
1,19
920%
NR
370
NR
156
Oli
n61
917
279
27%
75
497
398
14%
NR
281
21%
Un
ited
Tec
hn
olog
ies
135,
371
1,50
219%
11
4,1
25
1,3
22
16%
11
2,8
80
180
11%
Stu
rmR
uge
rN
RN
RN
R196
82%
Tab
le2:
Sal
esto
tals
for
sele
cted
firm
s.T
otal
sale
san
d%
reve
nue
from
arm
sta
ken
from
SIP
RI;
U.S
.D
epar
tmen
tof
Def
ense
sale
sfr
omau
thor
’sco
llec
tion
from
FP
DS.
Addit
ional
sale
sin
form
atio
nfr
omnon
-SIP
RI-
ranke
dfirm
sta
ken
from
annual
inve
stor
rep
orts
.A
llre
venue
rep
orte
din
million
sof
2000
US$.
20
idea that any investors might think that future earnings will be stronger even though the
conflict itself cannot be expected to change demand for the firm’s products might sound un-
reasonable. Unfortunately, the companies that sell defense-specific “consumables”—in other
words, firearms and ammunition, which would need to be replaced—tend to be privately-
held, so they do not lend themselves to this sort of analysis. Sturm-Ruger and Olin are two
exceptions, which is why they are included here. Colt, which makes the standard-issue M16
and M4 rifles, is not publicly-held.
Firms AverageArmsSales
AverageArmsSales %
Products
Boeing 4,372 21.38% Aircraft, electronics, missilesGeneral Dynamics 6,901 78.26% Aircraft, military vehicles, elec-
tronics, missiles, shipsGeneral Electric 3,990 8.22% Aircraft enginesNorthrop Grumman 7,686 83.11% Aircraft, electronics, missiles,
small armsOlin 565 22.25% Small armsRaytheon 7,260 53.67% Electronics, missilesSturm Ruger Small armsTextron 1,832 18.09% Aircraft, electronics, aircraft en-
gines, military vehiclesUnisys 2,620 20.00% ElectronicsUnited Technologies 4,125 16.14% Aircraft, electronics, missiles
Table 3: Average arms sales, and average percentage of arms sales compared to all revenue forsampled firms. Percentages found by weighted average across 1990, 1995 and 2000 periods.Listed military products reproduced from SIPRI yearbooks.
6.4 Selection of Conflict Events
Selecting a reasonable set of conflict events against which to test the market’s reaction is
surprisingly difficult. Aside from the inferential problem identified above in matching public
opinion polls to conflict data, coding rules themselves can be a source of confusion. Fishing
disputes, for example, meet the Militarized Interstate Dispute (Ghosn, Palmer and Bremer
2004) definition of a dispute because they necessarily involve the display of military force
(typically one state’s coast guard or navy) in response to a territorial incursion by foreign
citizens. While such conflicts may, and have, resulted in the occurrence of conflict between
21
different countries, this is not realistically the case for MID events involving the United
States during the time period of interest.
In order to determine the extent to which this would be a problem for my potential use
of the MID data, I compiled a set of narrative descriptions for the 123 MID records that
the United States was recorded as having been a party to between 1973 and 2001. MID
itself has generated narratives for a selection of disputes from roughly 1993 onwards. For
earlier disputes, I relied on Fordham and Sarver’s data on U.S. displays of force (Fordham
and Sarver 2001), which updates an earlier data collection by Blechman, Kaplan and Hall
(1978).18 Helpfully, this data lists the corresponding MID number when available; Fordham
and Sarver also supply descriptions of MIDs for which no use of force could be found in
contemporary sources.
Of 123 incidents involving the United States since 1973, 18 were fishing-rights disputes or
similar. Such incidents, per the MID 3.1 coding, rate a 15 on the 21-point “highest action”
scale, and are listed as a 4 on the 4-point hostility scale. The important implication this
carries is that it would be difficult to sample the MID data for a list of events to test here
that would both focus on those disputes that carried with them a genuine risk of war—in
other words, those disputes most likely to have been associated with information market
intervention—without also including a number of disputes that carried with them no risk of
war at all despite their inclusion in MID.
For that reason, I focus here on events drawn from the International Crisis Behavior data
(Brecher and Wilkenfeld N.d.). ICB’s sampling rules are much more strict than MID, which
is reflected in the number of events each dataset include; for example, MID lists 907 total
disputes across all actors between 1973 and 2001, while ICB only includes 186 disputes over
the same period of time. Of the 18 disputes involving the deployment or display of U.S.
military force after 1973, four are coded as having been triggered by the U.S. Restricting the
sample further to exclude purely economic or minor military disputes leaves an additional
12 that were triggered by foreign challengers.
7 Results
In order to determine whether there are any broad differences on how the firms included
in this sample responded to the set of crisis events, I first estimated cumulative abnormal
18The Blechman / Fordham-Sarver data collection was also used by Baum (2002), which itself was extendedwhen used by Groeling and Baum (2008).
22
Included
inSam-
ple
ICB
Crisis
#
Title
TriggerDescription
Revisionist
Trigger
Date
Trigger
Day
of
Week
Gra
vityofCrisis
259
Sei
zure
ofth
eM
ayag
uez
Vio
lent
act
Cam
bod
ia5/12/75
Mon
day
Th
reat
of
gra
ved
am
age
309
U.S
./
Iran
Hos
tage
Cri
sis
Poli
tica
lact
Iran
11/4/79
Su
nd
ayT
hre
at
toin
flu
ence
X33
0G
ulf
ofS
yrt
eI
Oth
ern
on
-vio
lent
act
U.S
.8/12/81
Wed
nes
day
Ter
rito
rial
thre
at
X34
3In
vasi
onof
Gre
nad
aIn
dir
ect
vio
lent
Gre
nad
a10/19/83
Wed
nes
day
Th
reat
toin
flu
ence
344
Ab
leA
rch
erN
on
-vio
lent
mil
itary
U.S
.11/2/83
Wed
nes
day
Th
reat
toex
iste
nce
X36
3G
ulf
ofS
yrt
eII
Non
-vio
lent
mil
itary
U.S
.3/24/86
Mon
day
Ter
rito
rial
thre
at
386
Lib
yan
Jet
sV
iole
nt
act
Lib
ya
12/21/88
Wed
nes
day
Th
reat
toin
flu
ence
X39
1In
vasi
onof
Pan
am
aP
oli
tica
lact
U.S
.12/15/89
Fri
day
Th
reat
toin
flu
ence
X39
3G
ulf
War
Vio
lent
act
Iraq
8/2/90
Thu
rsd
ayT
hre
at
toex
iste
nce
X40
3B
osn
iaP
oli
tica
lact
Bosn
ia3/3/92
Tu
esd
ayT
hre
at
toex
iste
nce
406
Iraq
iN
o-F
lyZ
on
eP
oli
tica
lact
U.S
.A
llia
nce
8/18/92
Tu
esd
ayP
oli
tica
lth
reat
411
Hait
iP
oli
tica
lact
Non-s
tate
7/1/94
Fri
day
Th
reat
toin
flu
ence
419
Des
ert
Str
ike
Ind
irec
tvio
lent
Iraq
8/31/96
Satu
rday
Th
reat
toin
flu
ence
X42
9U
NS
CO
MII
Poli
tica
lact
Iraq
10/21/98
Satu
rday
Th
reat
of
gra
ved
am
age
X43
0K
osov
oP
oli
tica
lact
Ser
bia
2/20/99
Satu
rday
Th
reat
of
gra
ved
am
age
X43
4A
fgh
an.
/9/
11
Vio
lent
act
Non
-sta
te9/11/01
Thu
rsd
ayT
hre
at
of
gra
ved
am
age
X44
0Ir
aqR
egim
eC
han
ge
Ver
bal
act
U.S
.9/12/02
Tu
esd
ayT
hre
at
toex
iste
nce
Tab
le4:
Cri
sis
even
tsin
volv
ing
som
em
ilit
ary
dep
loym
ent
by
the
Unit
edSta
tes.
Dis
pute
sin
cluded
inan
alysi
sar
em
arke
din
the
left
-mos
tco
lum
n.
Typ
eof
cris
istr
igge
r,cr
isis
star
tdat
e,re
vis
ionis
tpar
tyan
dcr
isis
grav
ity
asre
por
ted
by
the
Inte
rnat
ional
Cri
sis
Beh
avio
rsy
stem
dat
a.
23
returns for each of the firm–event combinations individually. These results are listed in tables
5 and 6, arranged in chronological order of the crisis events and alphabetical order of the
firms. The rank test statistics are calculated as described in equation 3 above, meaning that
each portfolio only has n = 1 firms. Since the daily return was calculated as Pricet−Pricet−1
Pricet−1,
we can interpret the CAR as a percentage of value. In other words, outstanding net shares
of Raytheon gained 5.7% in value in 1986 with the beginning of the second Gulf of Syrte
crisis between the United States and Libya. The large associated z-score generated by the
Corrado-Zivney rank statistic indicates that we can be well-assured that there is a difference
in that direction between the event and estimation windows. The market reappraised shares
of General Dynamic in a similar fashion, with prices of shares outstanding growing by 5%.
Of course, with 90 such combinations, larger patterns are difficult to discern. It may
also be the case that the results are suspect because of the relatively few degrees of freedom
available in the calculation of the rank statistic, as they are a series of one-firm samples.
Lacking a precise way to generate weights that might be used to combine the ten sampled
firms into a single portfolio, next I simply find the mean cumulative abnormal return across
all of them, and calculate the associated rank statistic again. These results are displayed in
table 7. Those events that generated a statistically significant difference in means are listed
in bold type.
After combining all ten firms, only three events seem to have been associated with sta-
tistically significant movements in their trading price. The Gulf War and Gulf of Syrte II
events both produced about 2% in additional value among defense firms. The first wave of
the post-Yugoslavian wars surrounding Bosnian independence also produced an effect, albeit
a smaller one with only a 0.8% change. More surprisingly, the 9/11 attacks—which were
of course a surprise—not only failed to produce a significant change, but the rank statistic
indicates that the probability of there being any difference between the estimation and event
means is a pure coin flip.
Examining the individual firm effects in table 6 demonstrates why. Many of the firms
did, in fact, experience large and significant shocks related to that particular event, par-
ticularly large contractors such as Northrop-Grumman and Raytheon. Firms with larger
civilian components to their business suffered, however, as economic confidence plummeted
in response to the attacks. This can be seen in sharpest relief by Boeing, which lost 20% of
its value in two days thanks to doubts about the immediate future of air travel. Although
including firms like Boeing and GE was meant to provide another means of comparison, in
this case their negative response to the conflict event is washing out the positive response of
24
Firm Event CumulativeAbnormalReturn
RankStatistic
p-value,one-tailed
p-value,two-tailed
Boeing Gulf of Syrte I 0.024 1.154 0.124 0.248General Dyanmics Gulf of Syrte I -0.001 0.165 0.435 0.869General Electric Gulf of Syrte I -0.019 -2.555 0.005 0.011
Northrop-Grumman Gulf of Syrte I 0.018 0.659 0.255 0.510Olin Gulf of Syrte I 0.000 0.165 0.435 0.869
Raytheon Gulf of Syrte I -0.009 -0.989 0.161 0.323Sturm Ruger Gulf of Syrte I 0.030 1.566 0.059 0.117
Textron Gulf of Syrte I 0.028 2.308 0.010 0.021Unisys Gulf of Syrte I -0.004 -0.247 0.402 0.805
United Technologies Gulf of Syrte I 0.008 0.742 0.229 0.458Boeing Invasion of Grenada -0.017 -1.154 0.124 0.248
General Dyanmics Invasion of Grenada -0.010 -1.236 0.108 0.216General Electric Invasion of Grenada 0.019 1.566 0.059 0.117
Northrop-Grumman Invasion of Grenada 0.029 2.720 0.003 0.007Olin Invasion of Grenada -0.031 -0.824 0.205 0.410
Raytheon Invasion of Grenada -0.013 -0.165 0.435 0.869Sturm Ruger Invasion of Grenada -0.074 -2.308 0.010 0.021
Textron Invasion of Grenada 0.001 0.577 0.282 0.564Unisys Invasion of Grenada -0.029 -1.566 0.059 0.117
United Technologies Invasion of Grenada 0.018 1.896 0.029 0.058Boeing Gulf of Syrte II -0.002 0.330 0.371 0.742
General Dyanmics Gulf of Syrte II 0.050 2.968 0.002 0.003General Electric Gulf of Syrte II 0.003 0.495 0.310 0.621
Northrop-Grumman Gulf of Syrte II 0.018 1.154 0.124 0.248Olin Gulf of Syrte II 0.013 0.247 0.402 0.805
Raytheon Gulf of Syrte II 0.057 3.297 0.000 0.001Sturm Ruger Gulf of Syrte II -0.007 -0.742 0.229 0.458
Textron Gulf of Syrte II 0.015 2.061 0.020 0.039Unisys Gulf of Syrte II 0.025 1.401 0.081 0.161
United Technologies Gulf of Syrte II 0.020 2.061 0.020 0.039Boeing Invasion of Panama -0.001 0.247 0.402 0.805
General Dyanmics Invasion of Panama 0.018 1.896 0.029 0.058General Electric Invasion of Panama -0.013 -1.978 0.024 0.048
Northrop-Grumman Invasion of Panama -0.008 -0.247 0.402 0.805Olin Invasion of Panama -0.007 -0.247 0.402 0.805
Raytheon Invasion of Panama -0.028 -2.555 0.005 0.011Sturm Ruger Invasion of Panama -0.056 -1.731 0.042 0.083
Textron Invasion of Panama 0.036 2.308 0.010 0.021Unisys Invasion of Panama -0.047 -1.896 0.029 0.058
United Technologies Invasion of Panama 0.000 0.577 0.282 0.564
Table 5: Cumulative abnormal returns with associated Corrado-Zivney rank statistics andassociated p-values, for Gulf of Syrte I through Invasion of Panama
25
Firm Event CumulativeAbnormalReturn
RankStatistic
p-value,one-tailed
p-value,two-tailed
Boeing Gulf War 0.004 0.000 0.500 1.000General Dyanmics Gulf War 0.103 3.380 0.000 0.001General Electric Gulf War -0.005 -0.577 0.282 0.564
Northrop-Grumman Gulf War 0.090 3.133 0.001 0.002Olin Gulf War 0.004 0.824 0.205 0.410
Raytheon Gulf War 0.120 3.380 0.000 0.001Sturm Ruger Gulf War -0.022 -1.566 0.059 0.117
Textron Gulf War 0.014 1.978 0.024 0.048Unisys Gulf War -0.083 -3.050 0.001 0.002
United Technologies Gulf War -0.002 0.165 0.435 0.869Boeing Bosnia 0.033 2.061 0.020 0.039
General Dyanmics Bosnia -0.018 -1.237 0.108 0.216General Electric Bosnia -0.018 -1.731 0.042 0.083
Northrop-Grumman Bosnia -0.011 -0.412 0.340 0.680Olin Bosnia 0.008 1.731 0.042 0.083
Raytheon Bosnia 0.018 2.061 0.020 0.039Sturm Ruger Bosnia 0.003 0.495 0.310 0.621
Textron Bosnia 0.030 1.978 0.024 0.048Unisys Bosnia -0.002 0.989 0.161 0.323
United Technologies Bosnia 0.040 2.308 0.010 0.021Boeing Kosovo 0.034 0.989 0.161 0.322
General Dyanmics Kosovo -0.017 -0.495 0.310 0.621General Electric Kosovo -0.006 -0.412 0.340 0.680
Northrop-Grumman Kosovo 0.026 1.896 0.029 0.058Olin Kosovo -0.064 -2.308 0.010 0.021
Raytheon Kosovo -0.012 -0.412 0.340 0.680Sturm Ruger Kosovo -0.005 0.000 0.500 1.000
Textron Kosovo 0.011 0.907 0.182 0.364Unisys Kosovo -0.006 -0.165 0.435 0.869
United Technologies Kosovo -0.025 -1.731 0.042 0.083Boeing Afghan. / 9/11 -0.197 -3.215 0.001 0.001
General Dyanmics Afghan. / 9/11 0.134 1.978 0.024 0.048General Electric Afghan. / 9/11 -0.038 -2.803 0.003 0.005
Northrop-Grumman Afghan. / 9/11 0.172 1.978 0.024 0.048Olin Afghan. / 9/11 0.032 0.330 0.371 0.742
Raytheon Afghan. / 9/11 0.317 2.473 0.007 0.013Sturm Ruger Afghan. / 9/11 0.144 0.989 0.161 0.323
Textron Afghan. / 9/11 -0.030 -0.247 0.402 0.805Unisys Afghan. / 9/11 -0.038 -1.566 0.059 0.117
United Technologies Afghan. / 9/11 -0.207 0.082 0.467 0.934Boeing Iraq Regime Change -0.022 -0.907 0.182 0.365
General Dyanmics Iraq Regime Change 0.053 1.649 0.050 0.099General Electric Iraq Regime Change -0.049 -2.226 0.013 0.026
Northrop-Grumman Iraq Regime Change 0.023 1.072 0.142 0.284Olin Iraq Regime Change 0.015 1.401 0.081 0.161
Raytheon Iraq Regime Change 0.030 0.742 0.229 0.458Sturm Ruger Iraq Regime Change 0.018 0.577 0.282 0.564
Textron Iraq Regime Change -0.023 -1.236 0.108 0.216Unisys Iraq Regime Change -0.018 -0.907 0.182 0.365
United Technologies Iraq Regime Change -0.048 -1.072 0.142 0.284
Table 6: Cumulative abnormal returns with associated Corrado-Zivney rank statistics andassociated p-values, for Gulf War through Iraq Regime Change
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Event Mean CAR RankStatistic
p-value,one-tailed
p-value,two-tailed
Gulf of Syrte I 0.008 0.8425 0.1998 0.3995Invasion of Grenada -0.011 -0.1085 0.5432 1.0000Gulf of Syrte II 0.019 3.5642 0.0002 0.0004
Invasion of Panama -0.010 -1.1794 0.8809 1.0000Gulf War 0.022 2.2264 0.0130 0.0260Bosnia 0.008 2.3279 0.0100 0.0199
Kosovo -0.006 -0.4555 0.6756 1.0000Afghan. / 9/11 0.029 0.0000 0.5000 1.0000
Iraq Regime Change -0.002 -0.1900 0.5753 1.0000
Table 7: Average cumulative abnormal return (arithmetic mean) across all ten firms, withassociated rank statistics and p-values
more defense-focused firms.
In a final test, I applied the same estimation but only to firms who derived at least 50%
of their revenue from arms sales. This led to a sample of three firms: General Dynamics,
Northrop-Grumman and Raytheon. As before, statistically significant responses are listed in
bold face. I also include the logged power ratio between the U.S. and its principal adversary
in order to provide a sense of whether intervention, measured by statistical non-significance
associated with the onset of a dispute, does indeed track with weaker international rivals.
Event ln(Power Ratio) Mean CAR RankStatistic
p-value,one-tailed
p-value,two-tailed
Gulf of Syrte I 4.65 0.002 -0.0977 0.5389 1.0000Invasion of Grenada 9.49 0.002 0.6427 0.2602 0.5204Gulf of Syrte II 4.38 0.042 3.4650 0.0003 0.0005Invasion of Panama 6.18 -0.006 -0.5435 0.7066 1.0000Gulf War 2.41 0.105 4.4581 0.0000 0.0000Bosnia 5.11 -0.004 0.2224 0.4120 0.8240Kosovo 4.29 -0.001 0.4510 0.3260 0.6520Afghan. / 9/11 NA 0.208 3.3104 0.0005 0.0009Iraq Regime Change 3.05 0.035 1.3452 0.0893 0.1786
Table 8: Average cumulative abnormal return (arithmetic mean) across three c ore defensefirms firms, with associated rank statistics and p-values. Power ratio calculated from Corre-lates of War composite scores.
27
Unfortunately, while this table is somewhat more compelling in that it rightly treats
the 9/11 attacks as a surprise, it does not offer any additional supporting evidence that
market behavior is reflecting information market intervention. In particular, the two weakest
adversaries in the sample, Grenada and Panama, both have small mean cumulative abnormal
return figures and do not approach statistical significance in their associated rank scores.
8 Concluding Thoughts
What can we take away from this analysis? Clearly, the evidence is somewhat mixed. On
one hand, it is encouraging that the stock market reaction after the Gulf War and 9/11
crises is what we would expect, with large price shocks produced by unanticipated news
that caused observers to adjust their expectations for the possibility of an armed conflict
involving the United States. On the other hand, performance in the other cases was less
encouraging. It may be reasonable that the crises in Bosnia and Kosovo did not meet with
similar reactions, as they were both provoked by comparatively tame (at least, at their outset)
political statements, and the disintegration of Yugoslavia was not completely unforeseen after
the end of the Cold War. However, the results for the Panama and Grenada crises are quite
poor. One would think that there would not need to be much public engagement at all before
a crisis with such small adversaries, and yet news of neither event seemed to be reflected in
the financial performance of selected firms. I run through a few possible explanations here:
Rationality of the marketplace: The simplest explanation might be that the market is
more rational than I have given it credit for. When discussing the research design above,
I merely expected that any unanticipated event would be reflected in the abnormal return
measure. However, the financial incentive to create that behavior may not obtain in each
and every crisis. In particular, while the Panama and Grenada crises did result in U.S.
invasions, both were rather short and against particularly weak adversaries. For that reason,
even though the crises themselves were not anticipated, it might be that investors did not
expect the future earnings of these firms to change all that much in response.
Small number of firms / firm selection: Despite the size of the American defense in-
dustry, there are surprisingly few contractors who derive a majority of their income from
defense-related sales. In the FPDS data described above, many of the largest vendors are
those that provide essentially civilian services, like construction, health care and telecommu-
nications, to the Department of Defense. These sorts of firms cannot be expected to move
all that much with individual crises, except for the sort of overwhelming event, like 9/11,
28
that manage to affect the entire market. An ideal estimation would consider firms with
particularly high exposure to the defense industry, as measured by the percentage of revenue
attributable to arms sales in general and to sales to the United States in general. For the
time period examined here, particularly after 1991, successive waves of consolidation in the
defense industry meant that only a few large firms were left standing by 2000. In order to
use the same firms across the entire sample, I have had to exclude a few of them, such as
Lockheed-Martin. It may be the case that finding some way to incorporate that additional
data is necessary for this analysis. Small firms that might either derive a high fraction of
earnings from defense sales or be focused on particular military products, like weapons, that
might be more sensitive to crisis events are likely to not be publicly traded, which is the
most significant challenge in this category.
Conflation with other financial events : I was first convinced of the appropriateness of
this approach while examining the record of more common research linking crisis events
to presidential approval data. As I argued earlier, the considerable amount of measurement
error produced by contemporaneous political events, like the Nixon pardon, suggest that such
approaches are flawed. The type of analysis I present here might share an analogous flaw,
however, in that it might be affected by contemporaneous financial events that overlap with
these particular disputes. These could be quarterly financial reports that were either more
or less optimistic than expected, accounting errors and financial restatements, or problems
with a firm’s own particular products—in other words, the types of questions that event
studies were originally meant to examine. I suspect that some of these obstacles can be
overcome with a more detailed examination of a subset of these firms, utilizing a time-series
estimation for each event that controls for unrelated financial news, as in Dube, Kaplan and
Naidu (Forthcoming).
ICB crisis coding : Finally, we might consider the nature of the dispute data. I chose the
International Crisis Behavior because its coding rules excluded spurious cases, and is closer
to capturing the set of observations of crisis negotiations as they are typically modeled in the
theoretical literature. The virtues of avoiding any treatment of American fishing disputes
comes at a price, however. An dispute enters the ICB sample on the first date that any
party to the dispute perceives a threat to its security, or “core values.” Other parties to
the dispute may not have perceived that same threat at the same time, however. Here,
I rely on the system-level data and consider only those events that saw at least a limited
American military response or redeployment. The implication is that the crisis trigger dates
for a dispute, and in particular for those disputes that were triggered by a non-U.S. state,
29
might be early from the U.S. view. This would mean that the market reaction should be
expected to develop after the ICB-coded date; I suspect this might be particularly true
for the Grenada dispute, in which the dispute is listed as starting with civil unrest within
Grenada in advance of the US military response.
9 Appendix: Brief Crisis Descriptions
∙ Gulf of Syrte I: A crisis for Libya was triggered by a U.S. announcement on 12August 1981 that its Sixth Fleet would hold maneuvers in the Mediterranean. Libyaresponded with a full military alert the same day. And on the 18th it accused theU.S. of violating Libya’s territorial waters by holding naval exercises within the Gulf ofSyrte. The next day two U.S. F-14s shot down two Libyan SU-22 fighters 60 miles fromLibya’s coast, but within the Gulf of Syrte–the only act of violence in this crisis. TheU.S. also warned Libya against retaliation, threatening to use military force if Libyaattacked U.S. aircraft or ships involved in the Sixth Fleet exercise.
∙ Invasion of Grenada: On 19 October 1983 (Grenada PM) Bishop was freed bysupporters but was quickly recaptured; in the firing that ensued, an estimated 200persons were killed or wounded by Austin’s troops. Soon after, Bishop and sevencabinet ministers and trade union leaders were executed. This act and a 96-hourcurfew, imposed by Grenada’s military authorities, triggered a crisis for the U.S.:Washington perceived a threat to its influence in the Caribbean and Central America,along with potential harm to U.S. citizens living in Grenada, about 1,000, mostlyuniversity students.
∙ Gulf of Syrte II: A full-scale foreign policy crisis for Libya was triggered by theimplementation of the 20 March announcement, that is, the entry into the Gulf ofSyrte of three U.S. naval vessels on 24 March. Libya, perceiving this act as a gravethreat to its territorial integrity, fired two Soviet-made SAM-5 missiles on U.S. carrier-based planes, causing no damage. U.S. planes then attacked a Libyan missile ship anda corvette, as well as mounting raids on the radar installations of Libyan batteries atSyrte. Another clash occurred on the 25th, with conflicting and disputed claims ofcasualties from another U.S. air attack. President Qaddhafi’s initial verbal reaction,the same day, took the form of tit-for-tat: ”this is not a time for speaking it is a timefor war.”
∙ Invasion of Panama: A crisis for the U.S. was triggered by an official statement inPanama City on 15 December proclaiming Noriega head of government. The next daya U.S. marine was killed by Panamanian soldiers. And Panamanian officials issued adeclaration of a state of war with the United States. (Many critics, within the U.S. andabroad, regarded these events as a pretext for a long-planned invasion.) The decision
30
to intervene was made by President Bush on 17 December. Its implementation, throughan invasion force of 26,000 troops on the 20th in ”Operation Just Cause,” triggered acrisis for Panama. On 21 December Panama’s church leaders, guardians of the May1989 election results, proposed that the winning candidate, Endara, be proclaimedPresident. This occurred after Noriega’s surrender on 3 January, following an intense12-day military campaign against him and his National Guard. This marked the endof the Invasion of Panama crisis.
∙ Gulf War: On 2 August 1990 Iraqi forces invaded Kuwait and occupied the emiratewithin six hours. This triggered the gravest of all possible crises for Kuwait, a threat toits existence as a state. The occupation of Kuwait and its huge oil resources was alsoperceived by the United States as a basic value threat. A U.S. statement on the 2ndcondemned Iraq’s invasion and called for the immediate and unconditional withdrawalof all Iraqi forces from Kuwait and the restoration of its legitimate government. Thesame day the UN Security Council adopted Resolution 660, the first of 15 during thecrisis, calling for Iraq’s complete and immediate withdrawal from Kuwait. The ArabLeague also condemned the invasion and called for Iraq’s immediate withdrawal.
∙ Bosnia: Bosnia’s Muslims and Croats voted strongly in favor of independence on 2March 1992 and requested recognition by the European Union (EU) and its members(the European Community [EC] was renamed the European Union [EU] in February1992, when the Maastricht Treaty came into effect). The Bosnian Serbs boycottedthe referendum and warned of grave consequences. The next day Bosnia declared itsindependence. That act triggered a crisis for Yugoslavia, dominated more than ever bySerbia, and enraged the Bosnian Serbs. Fighting broke out at once between BosnianMuslims and Croats on one side, the Yugoslav National Army (the JNA) and BosnianSerbs on the other. On 18 March, Bosnian Serb, Croat, and Muslim leaders signedan agreement in Lisbon to transform Bosnia-Hercegovina into three ethnic regionsor cantons within a formally united independent state. However, on his return toSarajevo, the (Muslim) President of Bosnia, Alija Izetbegovic, called on Bosnians toreject the division. He accused the governments of Serbia and Croatia of encouragingextreme Serb and Croat forces in Bosnia with the aim of partitioning Bosnia betweenthem.
∙ Kosovo: Since the FRY failed to secure a lasting peace agreement, on 24 March 1999,NATO aircraft began an attack against FRY military targets under Operation AlliedForce, triggering a crisis for the FRY. The bombing continued for three months. TheNATO crisis actors primarily relied on air attacks and imposing an embargo to pressureFRY President Slobodan Milosevic to the negotiation table. The use of ground forceswas often threatened but never implemented. While the NATO targets were onlymilitary and political in nature, the bombings occasionally extracted collateral civiliancasualties. The most egregious instance occurred on 7 May, when a US bomb struck theChinese Embassy in Belgrade, killing four Chinese nationals. On 9 June 1999, leadersof NATO and the FRY signed a technical agreement that promised the withdrawal of
31
FRY forces from Kosovo. The crisis ended for all actors the following day as the UNresolved to send a peacekeeping force to secure peace and monitor compliance.
∙ Afghanistan / 9/11: On 11 September 2001, terrorist attacks were conducted againstthe United States, the most destructive such attacks in history. This triggered a crisisfor the United States and its ally, the United Kingdom, which immediately pledged sup-port in finding the perpetrators of the attack. It also triggered a crisis for Afghanistan,since the US blamed the country’s Taliban regime for aiding and harboring al-Qaeda,the group held responsible for the attacks. Pakistan, Afghanistan’s neighbor and one ofonly three countries with diplomatic ties to the Taliban, was also a crisis actor becauseit played a crucial role in facilitating the attacks against Afghanistan and bore manyof the conflict’s externalities.
∙ Iraq Regime Change: In his speech to the General Assembly on 12 September2002, Bush announced the conditions the Iraqi regime had to meet immediately. ThePresident called for strong multilateral action against Iraq if it did not destroy theweapons and weapons programs that had been assumed to have been present in Iraq.Thus, Bush’s speech triggered a crisis for Iraq by increasing the threat perception, warlikelihood and time pressure for Saddam.
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