The economic impact of terrorism

By Professor Dimitris Petmezas, August 2022

We hear repeatedly from business gurus, economic experts and other industry advisers that to succeed in an increasingly unpredictable, volatile, global market, we need to boost our resilience. We need to be flexible and prepared for shock. But whilst governments and national bodies can build some defences for when the unexpected occurs, at a local level, it can be harder to overcome. 

When such unpredictable, damaging and shocking acts like terrorism occur, the consequences can extend beyond the tragic loss of life and damage to a community. It, understandably, takes time for people to recover emotionally, and areas impacted to recover visibly. However, there can also be far-reaching consequences when it comes to the recovery of the local economy — and not just for those businesses that are directly impacted by such events happening on their doorsteps. 

We can all agree that it's entirely human, and unquestioningly understandable that nobody in their right mind would choose to place themselves within striking distance of a dangerous situation — figuratively or literally. When such events occur, as well as those living and working in an area suffering as a result, the disruption is felt further as businesses and investors seek to distance themselves from the danger. 

What are the wider impacts of such deliberate distancing? My study, conducted alongside colleagues from Manchester Alliance Business School and Surrey Business School, sought to explore how exogenous shocks such as terrorist attacks can impact the business economy at a local level due to the uncertainty they leave in their wake. Most importantly, we sought to understand to what extent such shocks are felt and for how long after an event occurs. 

To conduct our research, we gathered data from a number of sources. First, we reviewed the M&A (Mergers and Acquisitions) activity of firms located in and around the locations of a sample of terrorist attacks across the USA that were heavily covered by media over a twenty year period — between 1995 and 2015.  

Then, to gain an insight into the scale of local level impact, we also utilised Metropolitan Statistical Area (MSA) data, which holds information on regions that consist of a city and surrounding communities linked by social and economic factors. Finally, we used physical distance to measure each firm’s geographic proximity from the attack locations for each event. 

To build a framework for such events, we also rated the severity of each terrorist attack by considering the number of human casualties involved. In doing so, some troubling findings were revealed…  

 Whilst an immediate negative impact of such shocks was to be expected, our study revealed several harmful consequences for firms located near terrorism-stricken areas when it came to their long-term M&A prospects. 

 Firstly, we saw that such firms become significantly less attractive to potential acquirers and, as a result, were less likely to receive an acquisition bid. Not only that, but the impact was also shown to last for as long as two years after the incident occurred. In a further blow, firms which had deals on the table before an attack occurred were, more often than not, far more likely to have those deals withdrawn in the weeks afterwards. The overall result was a significant hit to the local economy — a further complication on top of an already difficult situation. 

 Whilst there was some argument to be made for investors securing lower-priced acquisitions as a result of such events, or for a “bargain” becoming a more desirable option to potential investors, our findings didn’t support this perspective. Instead, we witnessed that acts of terrorism prompted acquiring firms to show their preference for cross-MSA targets, or targets located further away from where the acquirers were located. This supports the growing idea that target firms located in areas subject to a terrorist attack become less attractive as a result. 

 And for those few firms which did manage to secure deals? Our research revealed they did indeed receive a lower acquisition premium, leaving them with less bargaining power and less benefit when acquisitions did occur. Our study saw how this also translated into lower target firm stock returns and lower overall acquisition synergies.  

 As well as the significant hit to local economies in regard to their value and profitability, a combined impact of business struggles and the root cause of such difficulties also often resulted in decreased productivity, demotivated or uncommitted workers and a loss of human capital. Bringing the problem full-circle, the loss of talent can potentially stoke the flames of terrorism-induced uncertainty, as labour productivity in firms located in terrorism-stricken areas decreases, further increasing the real option value to delay or reduce the value of M&A investments.  

With such worrying findings, it’s important to remember there are lessons to be learned — not only by heads of industry when it comes to deciding how to staff, market, and protect their organisations, but beyond that to local and national governments and policymakers. Apart from the impact of terrorism on target firm’s labor productivity, our results also suggest that personal uncertainty and fear affect the acquirer-CEO’s bid decisions. They also uncover a negative link between terrorism intensity and acquisition premium offered, which becomes more pronounced when the acquirer-CEO is more risk averse or when target firms are more human capital dependent. 

For policymakers to combat this, greater consideration and expenditures on public security and local-level investment should also be considered to give companies a firmer grounding to bounce back.  

More information on Professor Petmezas's research interests.