A New Cold War? An Empirical Investigation of European Stock Market Effects Following the Crimean Crisis 2014

Abstract: In early 2014, Crimea became the focus of the worst East-West crisis since the Cold War. In this paper, the market reaction to adverse shocks to Russian-European relations following the Crimean Crisis 2014 is examined. Conducting an event study for 229 European companies operating in Russia, the study illustrates that these companies are hit by an average of -13.5% in cumulative abnormal returns over the entire crisis period. Results establish a clear negative relationship between cumulative abnormal returns and firms' Russia exposure, measured by fraction of sales, assets, as well as a dummy variable reflecting upon the firm's growth aspirations. One exception is the positive impact of a high share of Russian employees - a finding interpreted in light of Russia's communistic history, resulting in increased government reluctance to harm foreign firms providing substantial employment to the local population. By adding industry and geographic variables, the negative impact on abnormal returns proves to be more pronounced for consumer intense industries, low-growth industries, as well as German firms. Finally, linking the exposure measures to valuation theory indicates that these measures have additional explanatory power over changes in future expected cash flows, but not over changes in company riskiness. This thesis and its findings contribute to existing literature on the economic impact of wars and interstate frictions in three different ways: First, our work focuses on firm-level effects and consequently abstains from a GDP or index examination, an analysis more prevailing in literature. Second, by applying firm-level data, the study empirically investigates the relationship between operating exposure to the crisis region and cumulative abnormal returns - an entirely new approach in the European context. Third, our results may also be used by practitioners and other scholars in order to assess potential firm value effects, following future events related to the Crimean Region, a "ticking time bomb" with an uncertain outcome.