Int. J. Decision Sciences, Risk and Management, Vol. 5, No.

1, 2013

Is it all different now for businesses? An analysis of

terrorist attacks on businesses before and after 9/11
Sanjay Kumar*
Sam and Irene Black School of Business,
Pennsylvania State University Erie,
Erie, PA 16563-1400, USA
Fax: 814-898-6223
E-mail: sxk89@psu.edu
*Corresponding author

Jiangxia Liu
Dahlkemper School of Business,
Gannon University,
Erie, PA 16501, USA
E-mail: liu005@gannon.edu
Abstract: This paper analyses business vulnerability from terrorist attacks. We
specifically seek to understand the impact of terrorist attacks of 9/11. An event
study analysis reveals that publically traded companies when attacked lose on
an average 0.12% in the stockholder equity in a six-day period following the
attack. Attacks in post-9/11 period resulted in a significantly higher stock
decline of 0.70%. Pre-9/11 attacks did not have a significant impact on stock
returns. Since 9/11, financial vulnerability of businesses from terrorist attacks
has increased. Investors have become more risk averse to terrorist attacks. A
time series structural break analysis on terrorist attack frequency reveals three
breakpoints. The first two breakpoints, in 1997 quarter 4 and 2004 quarter 2,
reveals a significant increase in frequency of attacks on businesses. The attacks
increased about five-fold in pre-1997 to post 2004 periods. When 9/11 is
prejudged as a breakpoint, the frequency of attacks increased two-fold.
Terrorists are choosing businesses as targets with an increasing frequency. The
rise started before 9/11 and continued afterwards.
Keywords: risk; vulnerability; terrorist attacks; 9/11; event studies; supply
chain management.
Reference to this paper should be made as follows: Kumar, S. and Liu, J.
(2013) Is it all different now for businesses? An analysis of terrorist attacks on
businesses before and after 9/11, Int. J. Decision Sciences, Risk and
Management, Vol. 5, No. 1, pp.7592.
Biographical notes: Sanjay Kumar is an Assistant Professor of Project and
Supply Chain Management at Pennsylvania State University-Erie. He conducts
research and publishes in the area of risk management in supply chains. His
other research interests are financial operations management, behavioural
operations management, and risk management in supply chains. He has
consulting experience with many organisations and industries. He also had full
time positions with space and defence research organisations. He holds an MS
and a PhD from the University of Texas at Dallas.

Copyright 2013 Inderscience Enterprises Ltd.

75

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S. Kumar and J. Liu

Jiangxia Liu is an Assistant Professor of Accounting. She works in the area
of financial economics, corporate governance and compensation, earnings
disclosure, and gender pay issues. Her previous work experience includes
teaching at Western Carolina University and University of Electronic Science
and Technology in China. She holds an MS and a PhD in Accounting from the
University of Texas at Dallas.

Introduction

On July 22, 1968, an El Al flight was hijacked by the terrorist group Liberation of
Palestine. The event resulted in Israel offering significant concessions to terrorists by
releasing prisoners and recognising Palestinian interests (Hoffman, 2006). The magnitude
of the event was not much different from most other airline hijackings; however, the
event received widespread international media coverage. It demonstrated that a
well-executed transnational terrorist act could be effective in promoting terrorists
agenda. In the decades to follow, terrorists shifted focus from national to transnational
targets. Some consider the events of 1968 to be the beginning of transnational terrorism
(Brandt and Sandler, 2010).
The coordinated attacks of September 11, 2001 (henceforth, 9/11) resulted in the
highest number of fatalities of any terrorist attack. Almost every country was financially
affected. The attacks were attributed to have contributed to global recession. By attacking
strategically chosen financial and business interests, terrorists were able to gain intensive
media coverage and advertise their cause thereby gaining a wider popular support in
some countries (Sheehan, 2009).
Events of 1968 altered the terrorist target choice. What impacts did 9/11 have? In this
research, we seek to specifically understand the impacts of 9/11 on businesses
vulnerability from terrorist attacks. Business vulnerability is studied from the aspects of
financial and attack vulnerability. Financial vulnerability is measured using the stock
market consequences of terrorist attacks. Stock values provide a valuation of a
companys net worth. Any changes in stock price from terrorist attacks could reflect the
current and future financial impact of an attack. Attack vulnerability is measured by the
frequency of attacks and is studied using the RAND Database of Worldwide Terrorism
incidents. We specifically focus on attacks directed towards business interests. Both
vulnerabilities are compared between pre- and post-9/11 attacks.
To understand financial vulnerability we apply event study methodology and focus on
market returns when business interests are targeted by terrorists. Our focus is an event
window of (0, 5), which represents a six-day window following the attack. In over
320 attacks, in the period 19912009, terrorist attacks cause a statistically significant (at
1%) decline of 0.12% in affected firms stockholder equity. For the attacks in the post9/11 period the decline, significant at 1%, has been 0.70%, while attacks pre-9/11 did
not have a significant effect on stockholder equity. This implies that, when measured
using stock market reactions, businesses are vulnerable to terrorist attacks. Moreover, the
negative stock impact from attacks in the post-9/11 era is significantly higher than the
period before. 9/11 increased investors risk averseness towards terrorist attacks.
Attack vulnerability is studied using time series structural break analysis in
worldwide terrorist attack data. Presence of a structural break indicates a significant shift

Is it all different now for businesses?

77

in the frequency of attacks. Chow test and Bai and Perron (1998, 2003) procedures are
used to confirm and identify structural breaks. We find statistically significant breaks in
the frequency of attacks on business interests. Three breakpoints were found. During the
first breakpoint, which happened in the beginning of 1998, the number of attacks per
quarter increased over three-fold from 15.64 to 47.88. The second break in mid-2004 also
resulted in an increase from 47.88 to 70.18. The final break, in the second quarter of
2007, saw the attacks on business interests drop to an average of 36.09 per quarter. If
9/11 is prejudged as a breakpoint the attacks have increased from about 27 to 52 per
quarter in pre- and post-9/11 periods, respectively. This indicates that, considering the
frequency of attacks, the vulnerability of businesses from terrorist attacks has generally
increased in last two decades, with the exception of period between 2007 and 2009. 9/11
may have partially contributed to the increase.
Our research is of importance for company managers, investors, and policy makers.
For business managers it is important to understand the vulnerability from terrorist
attacks and the potential consequences of such events. Risk managers and supply chain
planners should focus on initiatives to prevent and manage terrorist attacks as their
frequency has been increasing. We also reveal potential financial consequences which
could help justify investment in risk mitigation practices targeted towards terrorist
attacks. Investors who take short positions on stocks should make decisions considering
the potential short term stock impact. Policy makers should direct resources considering
the financial impacts terrorist attacks could have.
The rest of the paper is organised as follows. In Section 2, we provide a review of
current relevant literature. Section 3 outlines our research questions. We discuss the data
source and research methodology in Section 4. Section 5 presents the results.
Implications of our research are discussed in Section 6. Section 7 concludes the paper.

Literature review

Terrorists attack to attract attention towards political or social issues. They often choose
easy targets that when attacked have the potential to advertise their cause. Businesses are
an easy and preferred terrorist target. Over 60% of all terrorist attacks are on business
interests (Stecke and Kumar, 2009). Our research is specifically focused on terrorist
attacks on business interests.
The 9/11 attacks attracted a significant amount of research to address motives of
terrorism and the associated human and capital losses. Counterterrorism is a facet that is
well studied. Policies to preemptively counter terrorism have been found to have mixed
results. Using a theoretical model, Landes (1978) showed that an increase in metal
detectors and probability of apprehension makes it harder for terrorists to target airlines.
The result could be decease in frequency of airplane skyjackings. Since terrorists are
utility maximising decision makers (Sandler, 2009), they react to target hardening by
focusing resources on other easier targets. Enders and Sandler (2006) found that
introduction of metal detectors decreased skyjacking at the cost of increase in other
hostage-taking incidents. Similarly, augmenting security reduced embassy attacks but
increased assassination of embassy officials at off-embassy locations. Terrorists choose
targets based on the easiness of successful attacks and the potential returns from an
attack. Since 9/11, an increased investment in hardening government and military targets
may have made businesses more vulnerable.

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S. Kumar and J. Liu

Surprisingly, some research also shows that terrorism prevention efforts and
investments do not have the desirable effects on terrorist attacks. A stream of literature
also supports the view that massive preemptive efforts to counter terrorism have made
the situation worse and terrorist organisations have more popular support (Sheehan,
2009). The 1980s anti-terrorism laws introduced by President Reagan failed to have an
impact on the frequency of attacks (Enders et al., 1990). In 1969, the British
Governments efforts to quell riots in Northern Ireland resulted in a more motivated Irish
Republican Army and an increase in number of attacks (Woods, 2003). More recently,
Global War on Terror did not result in any change in terrorist attacks (Enders and
Sandler, 2005). Using a time series analysis on terrorism data from 1993 to 2004,
Sheehan (2009) concluded that Global War on Terror resulted in a 74% increase in the
number of terrorist incidents. After 9/11, governments and businesses made investments
towards preventing and managing terrorist attacks. The stream of research discussed
above may indicate that increased investment may have resulted in an increase in
frequency of attacks on businesses.
Our focus on attack vulnerability is closely related to Enders and Sandler (2005).
Using quarterly transnational terrorism data for the period of 19702003, Enders and
Sandler (2005) study the changes in terrorism that followed 9/11. Their focus is primarily
on attack modes. They conclude time series data for all-incidents, bombings, and
casualties have not changed since 9/11. Other inferences were made regarding attack
modes. Logistically complex hostage taking incidents were found to have declined at the
cost of an increase in simpler, yet deadly, events such as bombings. Our research differs
from Enders and Sandler (2005) in the focus on business targets. Unlike their research,
that focuses on attack modes, our research efforts are directed towards businesses as an
attack target. We believe that our work is of importance to business decision-makers.
Also, our terrorism data extends to 2009, making it richer in post 9/11 time frame. This
allows us to better understand the impact of 9/11 and the changes since then.
A stream of literature focuses on the interaction of terrorism with economic variables.
Some of these include the interaction of terrorism with poverty (Abadie, 2006), tourism
(Drakos and Kutan, 2003), foreign direct investment (Abadie and Gardeazbal, 2003), and
economic development (Abadie and Gardeazbal, 2008). Other studies focus impact of
terrorism on financial markets. Chen and Siems (2004) show that a hand-selected set of
big terrorist attacks have negative impact on the stock markets across the world. Kumar
and Liu (2013) find that financial impacts of terrorist attacks spread across countries
through trade links.
Financial vulnerability of businesses from terrorist attacks in the form of stock impact
has received some attention in literature. Using event study methodology, similar to ours,
Karolyi and Martell (2010) found that attacks that are directed towards publically traded
companies result in a reduction of 0.83% in stockholder value on the day of the attack.
Their data includes 75 attacks, between the periods 19952002, that were targeted on
business interests. Publications of Department of Homeland Security were used to
compile the data. We differ from Karolyi and Martel (2010) as we reveal the financial
vulnerability change since 9/11 when terrorists attack business interests. A richer dataset
allows us to compare pre- and post-9/11 financial vulnerability of businesses.
In other research related to stock consequences from terrorist attacks, Berrebi and
Klor (2005) while focusing on Israeli companies that are traded in the USA, found the
impact of attacks to be 0.77%. The impact varied depending on the industrial sector of

Is it all different now for businesses?

79

the attacked company. For example, non-defence companies suffered a decline of

4.58% while defence-related companies reported a positive reaction of +3.89%.

Research questions

9/11 is believed to have changed the perception of common people towards terrorist
attacks (Karolyi and Martell, 2010). Popular news media also focus and report on
terrorist events as if they are different in the post-9/11 era (Enders and Sandler, 2005).
The severity, popular curiosity, and a desire to understand and mitigate terrorist attacks
have motivated researchers to understand the impact 9/11 had on the frequency and
modes of terrorist attacks (Sheehan, 2009). We focus on understanding the effects that
9/11 had on terrorists choice of business interest targets and financial vulnerability of
affected firms. Specifically, we seek to answer two questions.
Question 1

What effect, if any, did 9/11 have on the financial vulnerability of

businesses from terrorist attacks?

For a business, terrorist attacks could cause human and financial loss. Financial losses
could be direct and indirect. Direct losses may involve destruction of property and
infrastructure. Indirect losses could manifest in customer preference as, for a period of
time after the attacks, the affected company may not be able to make/deliver products to
customers. This may affect investor confidence. Nevertheless, terrorist attacks may
warrant valuable capital to be directed towards non-value-added activities of
infrastructure rebuilding and initiatives to prevent and mitigate future terrorist attacks.
Terrorist attacks could diminish the value of a company. According to efficient market
theory, value-relevant events such as terrorist attacks are expected to lower the
stockholder equity (Karolyi, 2006). We use stock market impact as a measure of current
and potential future financial impact from terrorist attack.
9/11 had significant economic implications for companies across the world. Investors
suffered huge losses during the stock market decline that followed 9/11. The event
revealed the extent to which stock markets are susceptible to terrorist attacks. Stock
markets often react to mood and perceptions of investors (Kumar and Liu, 2013).
Financial markets register gains or losses according to investors perceptions about the
future. 9/11 attacks affected public, government, and media perception about terrorist
attacks. Did the severe stock market losses from 9/11 changed the perceptions of
investors towards terrorist events? Did the event make investors more risk averse towards
terrorist attacks? If the perceptions and risk averseness changed, we should expect the
attacks in post-9/11 period to result in a higher decline in stockholder equity. In
summary, we study the stock market impact of terrorist attacks targeted towards
businesses. We also specifically focus on comparing the returns for attacks in the preand post-9/11 periods.
Question 2

Did 9/11 attacks affect terrorists preference of business interests as targets?

Business vulnerability is not only determined by the financial consequences from an

attack but is also affected by the frequency of attacks. There are reasons to hypothesise
that, since 9/11, terrorists may be more inclined towards attacking businesses. Terrorists
are rational decision-makers who mobilise resources based on the expected utility of a
target (Sheehan, 2009). From 9/11 attacks, the returns for terrorists, in terms of

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S. Kumar and J. Liu

destruction and worldwide media attention, were very high. Moreover, compared to
government and military establishments, businesses are less protected and are easy
targets (Stecke and Kumar, 2009).
Since 9/11, many countries have invested resources in preventing and controlling
terrorist events. The US Global War on Terror and USA Patriot Act were a
preemptive measure to curtail terrorism. Since its creation in 2004 to 2012, over
$2.8 trillion has been spent on Homeland Security Department (HSD, 2013). Most of
these efforts and investments are focused on hardening government and military interests
(Sheehan, 2009). However, terrorists are known to transfer targets between government,
military, business, and private parties depending on difficulty in attacking and the
potential returns (Brandt and Sandler, 2010). Do these arguments indicate that businesses
are easy attack targets with high potential returns?
Despite the arguments presented above that outline the possibility of an increase in
business attacks, one could argue that governments initiatives for terrorism prevention
may benefit businesses too. For example, by 2003, the US-led Global War on Terror
eliminated an estimated two-third of al Qaidas leaders (Gerges and Isham, 2003).
Initiatives were undertaken to make it difficult for terrorists to collect and mobilise funds.
These changes should make it difficult to attack any target, including businesses.
Businesses also responded to 9/11 with an increased emphasis and investment on
terrorism prevention and management efforts. Many companies increased security around
their premises. Some others responded by a more detailed assessment and evaluation of
trading partners (Sheffi, 2007). In general, businesses have increased investment to
protect their property and personnel (Brandt and Sandler, 2010). Governments initiatives
such as Customs Trade Partnership Against Terrorism were also intended in part to
benefit businesses. To understand the effect of 9/11, we study frequency of attacks
pre-9/11 and compare them to post-9/11.

Data and methodology

In this section, we elaborate on our data and rationale for choosing the specific dataset.
We also explain the research methodology used for analysing the attack and financial
data. Note that in most sections of this paper, financial vulnerability is discussed before
attack vulnerability. However, in this section we start off with terrorism data that is used
to assess the attack vulnerability. Financial data is discussed afterwards. The altered
presentation sequence, in this section, allows us to introduce terrorist attack database first
which is used for analysing both vulnerabilities. Financial vulnerability analysis requires
a subset of attack database and additional data regarding stock related information and is
presented in Section 4.2.

4.1 Terrorism data and structural break analyses

The data for terrorist events was derived from RAND Database of Worldwide Terrorism
Incidents. The database is an initiative of RAND National Defense Research Institute and
provides a comprehensive list of events from 1972 onwards. The compilation is unique
in care and consistency of terrorism definitions so as to identify only true incidents of
terrorism (RAND, 2013). According to RAND (2013), the objective of the database is to
help analysts, policymakers, and practitioners understand general trends in terrorism

Is it all different now for businesses?

81

events. Other popular sources include ITERATE derived from Vinyards textual
chronology of international terrorism, MIPT maintained by National Memorial Institute
for the Prevention of Terrorism, IPIC by International Policy Institute for Counter
Terrorism, and Pattern of Global Terrorism derived from HSDs annual reports. The
databases differ primarily in the definition of terrorism and the manner in which the data
could be retrieved. For example, IPIC database does not allow incidents to be categorised
based on the target type. Despite minor differences in definition of terrorist events,
Enders (2007) found statistical time series properties of these databases to be similar.
Table 1

Quarterly frequency of terrorist attacks on businesses (19912009)

Quarter

Number of
attacks on
businesses

Quarter

Number of
attacks on
businesses

Quarter

Number of
attacks on
businesses

1991 Q1

62

1997 Q3

13

2004 Q1

38

1991 Q2

16

1997 Q4

2004 Q2

52

1991 Q3

42

1998 Q1

52

2004 Q3

72

1991 Q4

1998 Q2

54

2004 Q4

93

1992 Q1

13

1998 Q3

27

2005 Q1

80

1992 Q2

15

1998 Q4

22

2005 Q2

57

1992 Q3

15

1999 Q1

77

2005 Q3

60

1992 Q4

14

1999 Q2

43

2005 Q4

51

1993 Q1

11

1999 Q3

22

2006 Q1

43

1993 Q2

12

1999 Q4

68

2006 Q2

73

1993 Q3

2000 Q1

37

2006 Q3

97

1993 Q4

11

2000 Q2

27

2006 Q4

51

1994 Q1

24

2000 Q3

49

2007 Q1

95

1994 Q2

15

2000 Q4

54

2007 Q2

65

1994 Q3

2001 Q1

43

2007 Q3

48

1994 Q4

2001 Q2

37

2007 Q4

47

1995 Q1

29

2001 Q3

82

2008 Q1

59

1995 Q2

17

2001 Q4

59

2008 Q2

58

1995 Q3

18

2002 Q1

35

2008 Q3

46

1995 Q4

11

2002 Q2

74

2008 Q4

32

1996 Q1

13

2002 Q3

39

2009 Q1

1996 Q2

2002 Q4

63

2009 Q2

13

1996 Q3

20

2003 Q1

47

2009 Q3

14

2009 Q4

1996 Q4

2003 Q2

42

1997 Q1

11

2003 Q3

54

1997 Q2

2003 Q4

48

We choose RAND database because of it being a comprehensive database for all

terrorism incidents including national and transnational events. The database is also
publically available for the period of our interest from 19912009. It allows an option to
collect data on attacks that were targeted on businesses. The data provides information on

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S. Kumar and J. Liu

daily terrorist events. We convert the daily data to quarterly data to avoid periods with
zero attacks. This conversion allows the data to adhere to the normality assumptions
needed for time series analysis. The resulting quarterly terrorist attack statistics are
presented in Table 1.
The existence of a structural break is identified using Chow test statistic (F-statistic).
The method essentially tests the deviations of time series data from a linear regression
model (OLS). While estimating linear regression parameters, Chow test statistic
computes the possibility of a structural break at each time point, which is a quarter in our
analysis. The whole time series data is fit into two sets of OLS parameters, one set each
for the time segment before and after the time point under consideration. The F-statistic is
computed using residual sum of squares (RSS) and error sum of squares (ESS) from the
two OLS segments (Hansen, 1997). For each time point an F-statistic and corresponding
p-values are identified.
We perform structural break analysis on time series data in Table 1. To identify the
number of breaks we use Bai and Perron (2003, 1998) procedure. Basic foundations for
structural breaks were developed by Bai (1994) and extended to multiple break points by
Bai and Perron (2003). A time series with a breakpoint would cause linear regression
coefficients to differ on either side of the breakpoint. Lack of breakpoint would allow a
single set of regression coefficients to efficiently represent the whole time series data.
Similarly, for a time series data with n breakpoints there will be n + 1 set of coefficients,
one set each for the segment between two breakpoints. The Bai and Perron (2003)
method to find the optimal number of breakpoints is based on dynamic programming
Bellman principle. The computational efforts required in calculating the number of
breakpoints involve estimating RSS for each segment (between breaks). Finally, a
Bayesian Information Criterion (BIC) is used to identify the best number of breakpoints.

4.2 Financial data and analyses

As a measure of short and long term consequences of terrorist attacks, we use stock
market reactions for the affected firm. Therefore, our analysis in this section requires the
attack to be directed towards a specific publically-traded company. The data from RAND
provides a brief description for each attack. From the data corresponding to Table 1 we
drop data that correspond to attacks for which no specific company is identified, attacks
that were not specifically targeted at a company, non-publicly traded companies were
targeted, and stock information for the attack period was not available. To eliminate bias
originating from large terrorist attacks, we eliminate data corresponding to events such as
9/11 attacks. These attacks, although affected companies, were not directed at a specific
company and if included would skew our results. The resulting data in Table 2 contains
68 companies and 322 attacks.
Current research to quantitatively assess the impact of terrorist attacks is limited in
scope because of databases used (Karolyi, 2006). Most research including Chen and
Siems (2004) and Chesney et al. (2011) focus on a hand selected set of events, limiting
the generalisability of results. Our research avoids this pitfall by using a large
multinational dataset of terrorist attacks on publicly traded companies.

Is it all different now for businesses?

Table 2

83

Attacked companies and number of attacks (19912009)

Company

No. of
attacks

Company

No. of
attacks

Alico Insurance

35 Jammu and Kashmir Bank

Alpha Credit Bank

36 Lloyds Bank

Apple Computer

37 Lukoil

42

38 Marriott

Banco Bilbao Vizcaya

Argentaria
Banco Santander Central
Hispano

39 Mazda

5
6

Bank of Cyprus

40 McDonalds

54

Bank of New York

41 Meridien Hotel

Barclays Bank

42 Microsoft

BMW

43 Mitsubishi

10

British Petroleum

44 National Bank of Greece

17

11

Chase

45 Nike

12

Chevrolet

46 Nissan

13

Chevron Oil

47 Occidental Petroleum

14

Coca-Cola

20

48 Opel

15

Credit Agricole Savings Bank

17

49 Park View Hotel

16

Dole

50 Pepsi

17

Dominos

51 Peugeot

18

EDF electricity company

52 Pfizer Inc.

19

Eurobank

53 Plum Creek Timber Co.

20

Exxon-Mobil

54 Renault

21

FIAT

55 Repsol-YPF

22

Ford

56 Schlumberger

23

French Telecom

57 Shell

17

24

GAP Inc

58 Sheraton Hotel

25

General Motors

59 SNC-Lavalin Company

26

GlaxoSmithKline

60 Societe Generale Bank

27

Goodyear

61 Suzuki

28

Halliburton Company

62 Telefonica company

29

Heavenly Ski Resort

63 Toyota

30

Hellenic Telecommunications

64 UPS

31

Honda

65 US Occidental Oil Company

32

HSBC

66 Vail Ski Resort

33

IBM

67 Wendys

34

Indian Oil Corporation

68 Weyerhaeser Logging Company

Total

322

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S. Kumar and J. Liu

The daily stock market information for each company was obtained in the following
manner. We identify the trading markets/country for the attacked company. Note that
some companies are traded in multiple countries. If the attacked company is traded in the
country of attack, we use the stock data from the same countrys trading market. If the
attacked company is not traded in the location of attack, we collect the stock information
from the companys main trading market which is typically in the place where the
company is headquartered. Some companies are not traded directly; however they could
be part of a larger conglomerate or an umbrella company. In such cases we use the parent
umbrella companys stock information. Stock information was collected from CRSP,
Yahoo Finance, and Google Finance.
Event studies have been constructively used to investigate financial stock market
response to new value-relevant information. According to efficient market theory when
new information is available, investors immediately reassess individual firms and
their ability to withstand potential economic, environmental, political, societal, and
demographic changes resulting from the event (Chen and Siems, 2004). The assessment
is then reflected in the stock returns around the event period. The stock markets are
efficient and should reflect the true value of the information (Schwert, 1981). Since
terrorist attacks cause potential short and long term losses for a company, the event
should result in a stock decline for the affected company.
The biggest influence of terrorist attacks is expected to occur on the day and few days
after the attack. For terrorist attacks that happen near or after trading market closings, the
effect on stock market should be reflected on the day following the attack. In other cases,
a company may not be traded in the country of attack, and international time differences
may allow only the day following the attack to register a stock impact. We focus on two
event windows. The first window of (0, 1) covers the day of attack and the following day.
Immediate impact of the terrorist attacks is expected to be registered in this window.
Sometimes markets may need a few days to realise the full potential of an attack. To
learn from such events, we study the window of (0, 5), which is a six-day event window
starting from the day of the attack.
Unlike ours, most event studies suffer from partial anticipation effect. Such effects
sometimes plague event studies as the information about the event could be available to
certain section of investors before the events formal announcement date. For example,
earnings information may leak and certain section of investors may get the information
prior to public announcements. This could allow informed investors to react before other
investors who may learn about the earnings on public announcement date. In such
scenarios, full impact of an event may not be observed in the post announcement period.
To counter this, most event studies analyse the impact of an event both prior and post
announcement date. Since terrorist events are not forecasted in advance, we do not expect
information leakage and do not study the period prior to the day of an attack.
We use the event study methodology as described in Brown and Warner (1985).
Using mean return methodology, abnormal returns on stock closing prices are calculated.
The methodology provides an approach to extract the impact of terrorist event from
inherent stock variability. Stock markets are unpredictable and random while an event
such as terrorist attack is expected to cause deviations that reduce the value of a stock.
Using the mean adjusted returns approach, we calculate daily abnormal returns for a
specific day t as follows.
ARt = Rt R

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85

where ARt is the abnormal return at time t, Rt is the actual observed return at time t, and
R is the mean-adjustment factor for daily return and is estimated over 40 days. The
estimation window is (50, 11). t = 0 is the event day. R is computed as follows.

R=

1
50

11
t =50

Rt .

In the absence of value relevant information one should expect the abnormal return to be
zero. If terrorist attacks have consequences for the future potential for a company the
abnormal returns is expected to be negative. The cumulative abnormal returns (CAR) are
calculated as:
CARw =

w
t =0

ARt .

where w {1, 5}, and represent a two-day event window of (0, 1) and a six-day window
of (0, 5). The two windows allow us to understand the immediate and short term impact
of terrorist attacks. In related studies, Karolyi and Martell (2010), Chen and Siems
(2004), and Chesney et al. (2011) use a methodology similar to ours to understand the
stock impact from terrorist events. The statistical significance of abnormal returns is
tested using t-statistics described in Patell (1976). We expect that terrorist attacks would
result in a negative and statistically significant CAR for the affected company.

Empirical results

Terrorism is a global phenomenon. Many terrorist organisations are sophisticated entities

that plan and execute international attacks. Research has shown that terrorists choose
between targets based on relative ease of a successful attack and the potential returns
from them. In part, the objective of terrorism is to cause human and economic damage to
targets and attract media attention to their cause. Businesses are relatively easy targets
and have the potential to cause economic losses for the targeted company. While focusing
on attacks on business interests, in this section, we study financial and attack
vulnerability.

5.1 Financial vulnerability from terrorist attacks

As indicated earlier we expect the terrorist attacks to cause a stock decline for the
affected companies. We study immediate and short term impact in a two-day and six-day
time windows. Since current stock valuation reflect the expectations of all future
potential returns, the short term impact on stock price should reflect the long term return
expectations and impact of the current event.
To understand the financial vulnerability of terrorist attacks, we conduct event
study on terrorist attacks on businesses for the years 19912009. The whole duration
(19912009) is then divided into pre- and post-9/11 periods with the objective of
identifying the impact of 9/11 on the reaction of stock markets to terrorist attacks. The
results for an event window of (0, 1) are reported in Table 3. Results indicate in a two day
window involving the attack day and the following day, companies on average lose
0.06% of stockholder equity. The decline is significant at a 5% level. Response of

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markets to terrorist attacks in post-9/11 period is even severe with stockholders losing
0.46% of their wealth. The decline is significant at 0.1%. In contrast, we did not find a
significant impact on stock returns for the attacks that took place before 9/11. A t-test for
the difference in mean CARs in stockholder equity for the pre- and post-9/11 periods
show that post-9/11 stock decline are significantly (at 1%) more negative than pre-9/11
attacks. T-test is not presented for brevity.
Table 3
Period

Abnormal returns in the event window (0, 1)

n

CAR

Patell Z stat.

19912009

258

0.06%

1.700*

Pre-9/11

117

0.41%

1.070

Post-9/11

141

0.46%

3.196***

Notes: *, **, and *** represent significance at 5%, 1%, and 0.1% respectively.

Similar to the event window of (0, 1) that represented immediate impact of terrorist
attacks, a medium-term window of (0, 5) also provides similar results. See Table 4. The
attacked companies lose on an average 0.12% (significant at 1%) in six days following
the terrorist events. The losses were higher at 0.70% (significant at 0.1%) when attacks
in the post-9/11 period are considered. Pre-9/11 attacks did not have a significant impact
on stock returns. Again, for the event window of (0, 5), a t-test indicates that post-9/11
attacks cause a greater decline (significant at 1%) in stock outcomes when compared to
pre-9/11 attacks. Our results for event windows (0, 1) and (0, 5) support our research
expectations posed in Question 1. The results also provide conclusive evidence to support
that businesses are vulnerable to terrorist attacks and when compared to pre-9/11 attacks
business vulnerability has been higher in the post-9/11 period.
Table 4
Period

Abnormal returns in the event window (0, 5)

n

CAR

Patell Z stat.

19912009

303

0.12%

2.648**

Pre-9/11

140

0.55%

0.143

Post-9/11

163

0.70%

3.716***

Notes: *, **, and *** represent significance at 5%, 1%, and 0.1% respectively.

5.2 Attack vulnerability from terrorist attacks

Figure 1 presents a plot of total number of terrorist attacks per quarter for the period of
19912009. Analysing quarterly, instead of daily or monthly data, allows us to use
statistical tests that follow normality assumptions, which are violated when data is
truncated on one end. Number of attacks on a specific day or sometime in a month could
be zero. Therefore, daily or monthly data would truncate the distribution at zero attacks.
A plot for frequency of attacks per quarter is shown in Figure 1. A qualitative view
indicates an increasing trend in number of terrorist attacks, especially until about year
2006. A slight dip could be observed in the period after that.

Is it all different now for businesses?

Figure 1

87

Total attacks on business interests per quarter (see online version for colours)

To identify if the time series data has any structural breaks, we use Chow test. The
F-statistics for each time instant is presented Figure 2. The F-statistic at a time instant is
equivalent to minimum OLS estimator assuming a two-segment partition, i.e., a single
break point. A region of plot is higher than the horizontal line representing a p-value of
0.01. The plot confirms existence of at least one breakpoint. Note that, in general, the
bigger is the F-statistics, higher is the significance level of a breakpoint at that time
instant. The higher F-value occurs in fourth quarter of 1997.
Plot of F-statistic (Chow test) (see online version for colours)

30
0

10

20

F statistics

40

50

60

Figure 2

10

20

30

40

50

60

Time

F-plot of Figure 2 also indicates that period around 9/11 (quarter 4 of 2001) has
F-statistics above the horizontal line representing a p-value of 0.01. This indicates that
9/11 could be considered as a statistically significant (at 1% significance) breakpoint.
This occurs as the OLS parameters that fit time series data pre- and post-9/11 segments
are significantly different. Under such a scenario, 9/11 resulted in an increase in per
quarter attacks from 27 to about 52.

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S. Kumar and J. Liu

RSS and BIC plots are shown in Figure 3. The plot visualises the BIC estimators for a
given number of breakpoints. The minimum BIC estimator criterion indicates a set of
three-breakpoint. Therefore, a set of four OLS parameters best fit the data.
Figure 3

Residual sum of squares and BIC (see online version for colours)

We now extract the breakpoints corresponding to a specified number of breakpoints from

1 to 5. The breakpoints are shown in Table 5. A breakpoint is the last time point in a
segment of time series data. Note that, as expected, 1997 Q4, which has the highest
F-statistic in Figure 2, is the breakpoint corresponding to the number of breakpoints as
one. Using the minimum BIC we have three breakpoints at 1997 Q4, 2004 Q2, and 2007
Q1. The number of attacks increases during the first two breakpoints while the third
breakpoint registers a drop in number of attacks. The change during the first two
breakpoints was 15.6 to 47.7 and then to 70.18 attacks per quarter. The average number
of attacks per quarter around the three breakpoints is shown in Figure 4. The frequency of
terrorist attacks towards business is increasing. We notice the increase to have started
before 9/11 in 1997. Another increase is registered in 2004, indicating that 9/11 may have
contributed to an increased preference of businesses as terrorist targets. Also note that
when 9/11 is prejudged as a breakpoint, the frequency of attacks post-9/11 is significantly
higher than pre-9/11.
Table 5

Breakpoints

Number of
breakpoints

Breakpoints

1997 Q4

1997 Q4

2007 Q1

1997 Q4

2004 Q2

2007 Q1

1997 Q4

2001 Q2

2004 Q2

2007 Q1

1994 Q1

1997 Q4

2001 Q2

2004 Q2

2007 Q1

Is it all different now for businesses?

Figure 4

89

Breakpoints and average number of attacks between breakpoints (see online version
for colours)

Discussion and implications

Since 9/11, academicians have taken a strong interest in studying terrorism and
counterterrorism (Sandler, 2009). We contribute to the research efforts by developing
insights into the vulnerability of businesses from terrorist attacks. The insights have
implications for business managers, investors, and government policy makers. Our
findings should also lead to further research in the area of terrorism and their business
impacts.
Todays marketplace is competitive. Success of a business requires intelligent and
informed decision making. Disruptions caused by events such as terrorist attacks could
hamper a firms ability to operate efficiently. Such disruptions could cause short term
financial losses by damaging property, shortage of material and manpower, inability to
deliver products or services, and diverting time and attention to terrorist activities. In the
longer run, terrorist attacks could warrant a higher investment in strengthening the supply
chains. Such investments could be made in increased security and insurance. The attacks
may also force managers to choose inefficient options. For example, attacks at a low cost
and efficient supplier may motivate manager to select a high cost supplier that is less
vulnerable to terrorist attacks.
Our results indicate that managers should plan for managing terrorist attacks. The
attacks not only cause direct financial losses in the form of human and infrastructure loss
but are also followed by stock market reactions. Stock markets experience a decline
following the attacks. We found that financial losses measured by stockholder wealth are
higher in post-9/11 attacks. The higher stock price decline in post-9/11 period indicates
that companies should be extra cautious in terrorism prevention and mitigation. This
should warrant additional resources and plans to manage attacks. Also the stock decline
provides an estimate of the value of preventing an attack. For example, preventing an
attack could help a company avoid losing 0.70% of the stockholder equity in a six days
following the attack. For a company worth $100 million, the value of preventing attack is
$700,000.
Globalisation makes companies vulnerable to terrorist attacks that happen across the
world. Global reach often allows efficient operations as companies could take advantage

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of competencies and markets worldwide. Our results indicate that companies should give
due emphasis to terrorist attacks while planning global operations. Decisions such as
supplier selection, transportation routes, and market outlets should be made considering
the possibility of terrorist attacks.
Despite increased investment and initiatives by government, terrorist attacks on
businesses have increased for most of the 1990s and 2000s. The stock impact has also
been higher since 9/11. This indicates that businesses should not exclusively rely on their
governments to provide them a safe business environment. Businesses should also take
initiatives in terrorism prevention as it is expected to pay dividends by helping avoid
stock downfall.
Investors rely on up-to-date information about a companys operations to make
decisions regarding the value of a company. A terrorist attack lowers the worth of a
company. While making stock portfolio decisions, the possibility of terrorist attacks
should be taken into account. Our results are of much more importance to investors who
take short positions on stock markets. Such investors may benefit by selling the stocks of
companies that have been attacked.
Businesses are the backbone of modern industrial world. As evidenced by 9/11
attacks, terrorist attacks could cause huge financial losses. To help economic growth,
government policymakers should focus attention on helping businesses avoid and
mitigate terrorist attacks. In the past, governments have been primarily focused on
preventing attacks on public and military targets. Such actions may be helpful for some.
However, the focus may leave businesses more vulnerable as terrorist may find it easy to
attack businesses. Businesses may not have the resources or expertise needed to stop
multi-national terrorism. Therefore, considering the potential financial losses,
government policies should be made towards preventing attacks on businesses.

Conclusions

9/11 is believed to have changed public perception of terrorist attack. It also resulted in a
greater attention by media while reporting terrorist events. Governments of various
countries realised the full human and economic potential of terrorist attacks and took a
more proactive role in preventing and managing terrorist attacks. Large investments were
made. However, it is arguable if the investments have led to desired returns.
We study terrorist attacks across the world that happened in the period of 19912009.
A structural break analysis of time series terrorist attack data reveals that attacks on
businesses were on a rise for most of the two decades that we studied. The three
statistically significant structural breaks were found in 1997 Q4, 2004 Q2, and 2007 Q1.
The number of attacks per quarter increased during the first two breaks, while a decline
was observed in the third break. For the most part, vulnerability of businesses from
terrorist attacks increased from in 1990s and 2000s. Enders and Sandler (2005) and
Enders (2007) found that 9/11 did not have any significant changes in primary terrorist
time series data. These papers were specifically focused on the mode of attacks such as
assassination, bombing, kidnapping, etc. Our results indicate that even if the mode of
attacks has not changed, the events of 9/11 did increase the vulnerability of businesses.
An event study analysis of stock market reactions to terrorist attacks was undertaken.
The analysis indicates that businesses experience negative stock market consequences in
the days following an attack. The stock returns were negative for the period of

Is it all different now for businesses?

91

19912009. When the duration was divided into pre- and post-9/11, we found
surprisingly different reactions. Attacks in pre-9/11 period did not register a significant
stock decline, but in the post-9/11 period, terrorist attacks caused a significant negative
reactions to stock values. After 9/11 media focus and public attention towards terrorist
attacks increased. Similar effects happened in investors consideration of terrorist attacks
in evaluating its impact on stock market. Investors perceive terrorist attacks to have
greater negative impact in the post 9/11 period. Investors risk averseness to terrorist
attacks has increased.
In summary, our research reveals the vulnerability of businesses from terrorist
attacks. The vulnerability in terms of frequency of attacks is on a rise. Terrorists attack
businesses more frequently while the investors punish affected companies more severely
in post-9/11 period. Our research has implications for business managers, investors, and
government policy makers.

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