Kidnappings have a more damaging financial impact on companies than other forms of terrorist attacks, a recent study found.

The study, co-written by a Canadian finance professor, examined 75 terrorist attacks of all types between 1995 and 2002 on publicly traded companies. The study found that the share prices of the affected companies fell on average by 0.83 percent immediately after the attack. That translated into an average loss in market value of $401 million for each affected company.

The effect was more dramatic when only kidnappings were considered. The share prices of companies struck by the abduction of key employees fell by 1.1 percent on average, according to the study.

"We find that human capital losses, such as kidnapping of company executives, are associated with larger negative stock price reactions than physical losses, such as bombings of facilities or buildings," said the study, co-authored by Andrew Karolyi, a Canadian professor at Ohio State University.

Karolyi said the share prices of the attacked companies remained low for nearly a month and the incidents did not appear to have any impact on the shares of competitors. The study is the first of its kind and Karolyi said it has sparked some heated debate. It was first published last November and recently updated.

"I've had people react to these numbers and say 'Oh, you are way understating the dimensionality of this because there's all sorts of indirect costs and spillover costs to other companies,' " he said. "Other people have said 'Oh no, this is way overstating this. You've got these crazy people as marginal investors that leap to all sorts of overreactions around these events.' I don't know which way to go."

He said the study was done largely to help the insurance industry and the U.S. government better assess the financial impact of terrorist attacks. And he acknowledged that more work needs to be done.

This study "may be a very coarse and inappropriate measure of the magnitude of these events. It could be that we are missing a lot," he said.

The research drew on annual data about terrorist attacks compiled by the Counterterrorism Office of the U.S. Department of State. Of the 881 attacks listed between 1995 and 2002, the authors zeroed in on 75 that were directly made against companies. The companies hit most frequently were McDonald's Corp., with 10 attacks, and Royal Dutch Shell PLC, with nine.

The results excluded the impact of the Sept. 11, 2001, terrorist attacks.

Some of the attacks examined included the bombing of two McDonald's restaurants in Athens in 1998, an attack on the Allied Bank building in the Philippines in 2001 and several kidnappings and bombings in Colombia.

Of the 75 attacks reviewed, 15 occurred in Nigeria and 14 in Colombia. Oil companies were targets in 34 cases, while food and fast-food businesses were involved in 20 others. The majority of companies hit, 45, were American. Five were Canadian, including a subsidiary of EnCana Corp. that had eight oil workers kidnapped and later released after payment of a ransom in Ecuador in 1999.

Karolyi said he and his colleagues excluded the Sept. 11, 2001, attacks from part of the research in order to provide a clearer picture of the impact of terrorism on corporations (the study did include those attacks in other calculations).

"We wanted to broaden the perspective across countries and over time, beyond just that one incident, so we could get a better sense of what we are talking about," he said.

Karolyi added that the team recently reviewed about 20 terrorist attacks in 2003 and found that the impact on share price was consistent with the earlier attacks.

"People ask me, 'Do you really believe that there is some sort of terrorism risk factor that's imbedded in the pricing of these stocks?' " he said.

"I can't say, based on anything we've done in this research, that that's the case. But that's the very next logical question."

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)

_____________________________________________

By PAUL WALDIE

© 2006. Record Searchlight
The E.W. Scripps Co.
All rights reserved.