Impact of terrorism and political instability on equity premium: Evidence from Pakistan

• DOI: 10.1016/j.physa.2017.11.095
• Publication Date: 2017-11-26T21:30:43Z
• Authors: Wu MengYun; Muhammad Imran; Muhammad Zakaria; Zhang Linrong; Muhammad Umer Farooq; Shah Khalid Muhammad
• Keywords: 0502 economics and business; 05 social sciences; 8. Economic growth; 1. No poverty; 16. Peace & justice

Abstract The study quantifies the impact of terrorism and political instability on firm equity premium in Pakistan using panel data for 306 non-financial firms for the period 2001 to 2014. Other variables included are law & order, government regime change and financial crisis of 2007/08. The estimated results reveal that terrorism has statistically significant negative impact on firm equity premium in Pakistan. This result is robust with alternative equation specifications. The result also remains same when terrorism variable is replaced with external and internal conflict variables. Law & order variable has significant positive effect on firm equity premium, which implies that equity premium increases with the improvement in law & order situation in the country. Equity premium also increases with government stability and when there is democratic system in the country. The result also reveals that global financial crisis of 2007/08 negatively influenced the firm equity premium. The study suggests some policy implications.