Is bad news ever good for stocks? The importance of time-varying war risk and stock returns

by Gertjan Verdickt (University of Antwerp)

This paper was presented at the EHS Annual Conference 2019 in Belfast.

 

'Brussels_Stock_Exchange_Building_(Bourse_or_Beurs)'_by_Tania_Dey
Brussels Stock Exchange Building (Bourse or Beurs). Available at Wikimedia Commons.

One of the most severe events that affect stock markets is arguably a war. Because wars rarely occur, it is difficult to document what the effect of an increase in the threat and act of war is. Going back to history can go a long way to fill this gap.

In my research, I start by collecting a large sample of articles from the archives of The Economist to create the metrics, Threat and Act. This sample contains 79,568 articles from the period January 1885 to December 1913. To mimic investors and understand the content of news items, I rely on a textual analysis with a thorough human reading.

First, I document that Threat is a good predictor for actual events. If The Economist writes more about a potential military conflict, the probability of that conflict actually happening in the future is higher.

The other metric, Act, only captures conflicts that are happening right now. This suggests that, in contrast to what other historians find, The Economist did not write about war excessively but chose their war news coverage appropriately.

Verdickt Graph

Second, I focus on seven countries with stock listings on the Brussels Stock Exchange: Belgium, France, Germany, Italy, Russia, Spain and the Netherlands. These countries are important for Belgium, either through import and export or with a large number of stock listings in Brussels.

Additionally, I use information on other European and non-European countries with stock listings in Brussels to test whether war risk could be considered a European or global form of risk.

For the seven countries, I document that firms do not adjust dividend policies when there is an increase in the threat of war, but only when there is an outbreak of war.

Investors, on the other hand, sell their stocks when there is an increase in the potential and outbreak of a military conflict. When the threat is not followed by an act, stock prices adjust increase to the similar levels as before.

But when there is an outbreak of war, stock returns are negative up to 12 months after the initial increase. This shows that war risk is priced appropriately in stock markets, but that the outbreak of war is associated with higher uncertainty and welfare costs.

More interestingly, I show that there is a decrease in stock prices for other European countries, but no effect for non-European countries. This suggests that investors value the importance of proximity to a war. But firms from these countries do not adjust their dividend policy when threat and act increase.

Upward mobility of Nazi party members during the Third Reich

by Matthias Blum and Alan de Bromhead (Queen’s Management School at Queen’s University Belfast)

This paper was presented at the EHS Annual Conference 2019 in Belfast.

 

 

DettenSahmGoeringLippertErnstGoerlitzer
Gathering of high-ranking Nazi officials in Berlin. Left to right: Georg von Detten, Heinrich Sahm, August Wilhelm of Prussia, Hermann Goering, Julius Lippert, Karl Ernst and Artur Görlitzer. Available at Wikimedia Commons.

Members of Nazi organisations climbed higher up the social ladder than non-members in the 1930s and 1940s. This was not due to Nazis being awarded higher-status jobs, but instead to already upwardly mobile individuals being attracted to the movement.

We examined a unique dataset of approximately 10,000 World War II German soldiers that contains detailed information on social background, such as occupation and education, as well as other characteristics like religion, criminal record and military service. The dataset also identifie membership of different Nazi organisations, such as the NSDAP, the SA, the SS and the Hitler Youth.

Comparing the social backgrounds of Nazi members and non-members reveal that Nazis were more likely to come from high-status backgrounds and had higher levels of education. Indeed, the odds of being a member of the Nazi party were almost twice as high for someone from a higher-status background than a low-status one. We also confirm a common finding that Catholics were less like to be Nazi members.

When looking at social mobility between generations, Nazi members advance further than non-members. But this appears to be driven by ‘upwardly mobile’ people – those that showed social mobility early on in their lives – subsequently joining the Nazis. This suggests that ‘ambitious’ or ‘driven’ individuals may have been attracted to the Nazi movement.

Although it is impossible to uncover exactly what motivated people to join the Nazis, our findings suggest that many educated and ambitious individuals from the higher end of the social scale were attracted to the movement. Interestingly, this seems to be the case not just for those who joined after the Nazi party came to power in 1933, but also to members who joined when the party was on the fringes of the Weimar political system in the 1920s.

Our study not only helps us to understand how the Nazi party emerged and came to power in the years before World War II, but also gives us an insight into how extremist organisations form and attract members more generally. It reminds us that we need to think beyond pure ideology when it comes to motivations for joining extremist groups and look at economic and social factors too.

 

For more information on the preliminary findings of the study, please visit: http://www.quceh.org.uk/uploads/1/0/5/5/10558478/wp17-04.pdf

Financing the fight: sovereignty, networks and the French resistance during World War II

by David Foulk (Oriel College, University of Oxford)

This paper was presented at the EHS Annual Conference 2019 in Belfast.

 

Commander_of_Free_French_Forces_General_Charles_de_Gaulle_seated_at_his_desk_in_London_during_the_Second_World_War._D1973
Commander of Free French Forces General Charles de Gaulle seated at his desk in London during the Second World War. Available at Wikimedia Commons.

Under General Charles de Gaulle, the Free French movement represented a different conception of France – free from the defeat that Marshal Philippe Pétain’s armistice and the Vichy regime represented. While metropolitan France had been overrun, subjugated under enemy jackboots, this could not be said for all French overseas territories.

When de Gaulle formed his military movement, in London, there was no indication that those colonies would support his efforts to rally an external resistance movement. But by the end of 1940, some had rallied to his side.

Such actions would fundamentally change the nature of the movement; from a purely martial enterprise, into a state-in-waiting. This raised important questions of sovereignty.

These territories were part of the French empire yet were being driven to support a rebel movement, in the hope of liberating France. Who was to support their economy? What part were they to play, both economically and militarily?

Having been separated from metropolitan French institutions, including the Banque de France, these territories began to experience economic difficulties, including the replacement of used banknotes and the brutal separation experienced, from their chief export markets.

Under the leadership of ‘experts’, supported by the Bank of England and His Majesty’s Treasury, the Free French financial service found a method to finance their cause: one based on British government advances, transnational donations and colonial exploitation.

Their funds supported covert action in France. The Gaullist equivalent of the Special Operations Executive, known as the Bureau Central de Renseignements et d’Action, parachuted containers, filled with weapons, equipment and currency, in francs and dollars, into France.

These groups were created to perform sabotage, diffuse propaganda and establish escape routes for downed Allied airmen and other groups, targeted by the invading forces or Vichy’s civil security. Obtaining finance was a perpetual problem.

Jean Moulin, the former prefect of Eure-et-Loir, was appointed as General de Gaulle’s representative to the internal resistance movements. His role was to act as a coordinator for the three main groups – Combat, Franc-Tireur and Libération. This was achieved through a judicious use of finances, organised by his secretary, Daniel Cordier.

Great stock was placed in Moulin’s powers of political persuasion. His mission was a success and the Mouvements unis de la Résistance was established in January 1943. Without the financial backing of the Gaullist movement, this internal network could not have existed. This did, nevertheless, offer credence to Vichy propaganda, which implied de Gaulle and his movement were under the control of the British government.

American economic support came in the form of Lend-Lease, by supplying the majority of Free French troops with equipment and weapons. Moreover, it was reimbursed, in part, through reciprocal aid.

This entailed French bases providing housing, office and workspace, to help US troops launched operations, notably in New Caledonia, in the Pacific. A delegation of Free French supporters, from within the United States, acted as a financial conduit for funds being sent from other support groups, throughout the world.

The predecessor to the CIA, the Office of Strategic Services, through Allen Dulles, financially supported resistance activity from Switzerland. This briefly allowed the Americans a means of bypassing Gaullist intelligence services. The transnational nature of the financing for the French resistance is underlined.

Using social network analysis, a digital humanities technique that cartographically plots interactions between correspondents, the key figures, from among the financiers of the resistance, are shown in my study.

Through their interactions, financial ties that bound the French resistance to those who drove its economic policy are revealed. Without international support, military resistance in France would have been inconceivable.

Income inequality in times of war and revolution: the city of Moscow in 1916

by Elizaveta Blagodeteleva (National Research University Higher School of Economics)

This research will be presented during the EHS Annual Conference in Belfast, April 5th – 7th 2019. Conference registration can be found on the EHS website.

 

Moscow,_Kremlin,_Voznesenskaya_Square,_1900s
Voznesenskaya Square, 1900s. Available at Wikimedia Commons.

In autumn of 1916, a big scandal roiled the Moscow public: local landlords petitioned the municipal government for the permission to raise rents, which was prohibited by the military administration a year before amid the escalating refugee crisis. Newspapers fumed at the selfishness of the rich, who not only avoided serving their country at the battlefield but exploited wartime hardships to get even richer. Health inspectors, lessees and workers of the largest industrial plants publicly raised their objections to the proposal.

Although the concerted effort of the city landlords to increase revenue eventually failed, the public outrage persisted. The occasional evidence of huge war profits and rumours about the luxurious life of industrialists and rentiers stoked anger among the urbanites, who struggled to make ends meet under the increasing pressure of galloping inflation and food shortages. The rent scandal highlighted the growing animosity towards the rich that the Bolsheviks would later channel into fully-fledged class warfare.

In 1916, Moscow residents sincerely believed that the gap between the wealthy and the rest of the population was enormous and it kept widening at an alarming pace. But did their beliefs match reality? In other words, how unequal was urban society in Russia in the last year of the old regime? To answer this question, a student of social and economic inequality would usually refer to income tax records. Unfortunately, there are very few of them in case of imperial Russia.

The Russian authorities had been extremely wary of income taxation up until the beginning of the Great War, when the national political mobilisation elevated the issue of the personal responsibility of each and every subject of the tsar. As a result, the state legislature passed an income tax in the spring of 1916. Its political objectives overwhelmed fiscal practicalities as lawmakers wanted it to bring the state closer to the ‘pockets’ and ‘hearts’ of the people. The progressivity of the new tax was supposed to ensure the levelling of the great fortunes and make the body politic more cohesive.

Since tax collection began in March 1917 and continued through the period of an intense power struggle and regime change, surviving records are patchy. Neither the tsar’s local treasures nor early Soviet fiscal authorities left comprehensive accounts of the sums collected in 1917. Nevertheless, Moscow archives have preserved some tax rolls that document the personal incomes for the year 1916, reported by taxpayers and then ascertained by tax collectors in the first half of 1917.

The records allow a tentative reconstruction of the level of income inequality in the city. Given that the adult population of Moscow amounted to 1.1 million in the spring of 1917, the estimates show that the wealthiest 1% and 5% must have received and then reported about 45.9% and 58.8% of their total income. With the Gini coefficient standing at 0.75, those shares display an extremely high level of income inequality among the city residents in 1916. A huge gap between the rich and the others not only felt real but was real.

Foreign intervention can bring stability…but stability is overrated: the United States in Latin America 1905-31

by Leticia Abad (City University of New York) and Noel Maurer (George Washington University)

This research will be presented during the EHS Annual Conference in Belfast, April 5th – 7th 2019. Conference registration can be found on the EHS website.

 

James_Monroe_Cabinet
‘The Birth of the Monroe Doctrine’ – US President James Monroe presides over a cabinet meeting in 1823, discussing the Monroe Doctrine. Available at Wikimedia Commons.

Every time American intervention in some faraway conflict appears to be off the table, another call for it rises. Today the example is the Bolivarian Republic of Venezuela, where President Nicolás Maduro has neutered the elected parliament while causing the economy to collapse to the point of famine. The Trump administration has openly backed the opposition and the president himself has floated the possibility of military intervention.

Donald Trump is following in the footsteps of President Theodore Roosevelt, who ushered in an earlier era of American intervention with his famous 1904 call: ‘The adherence of the United States to the Monroe Doctrine may force the United States, however reluctantly, in flagrant cases of such wrongdoing or impotence, to the exercise of an international police power.’

Roosevelt’s declaration began a three-decade period of extensive American intervention, in which the United States used its tools of national power to intervene in the affairs of Latin American governments. The United States took over the fiscal institutions of no fewer than eight (out of 19) Latin American states over the period; deployed military forces in five; and took over the entire state (for a time) in three.

What can that earlier period tell us about the wisdom of modern-day calls for intervention?

In research to be presented at the Economic History Society’s 2019 annual conference, we find that US intervention in the period 1905-31 indeed reduced political instability. The number of coups and coup attempts fell, as did the severity of political violence.

More specifically, US intervention reduced the probability of an unconstitutional regime change by 10% and the intensity of political violence (measured by the number of deaths per day in political violence) by almost half. In that sense, intervention worked.

But the United States failed to accomplish its other goals. American aims were not just to reduce violence; they hoped to decrease corruption, increase government revenue and promote investment in the intervened nations.

We find that the efficiency of government institutions – measured by the ability to collect customs revenue – did not change: in fact, it appears to have fallen. That is to say, intervened governments got worse at carrying out their governing functions.

Nor did foreign investors invest more capital into the intervened countries. Neither the stock of portfolio investment, foreign direct investment nor domestic investment budged. The volume of trade did not grow. What did change, however, was an increase in the short-term profits of existing bondholders and trade diversion towards the United States.

In short, intervention provided political stability to the target countries. It also generated private benefits for American investors and traders. But it did little to improve those countries’ quality of governance or long-term growth prospects.

Two general lessons emerge from our work.

First, political stability may be overrated. Investors don’t seem to care, at least inasmuch as instability doesn’t directly affect them. The reason, we postulate, is that investors have many ways of protecting their interests in poor and unstable countries.

Foreign intervention therefore provides a nice benefit to creditors, who believe that it raises their chances of being repaid, but it does little to prompt them to risk good money after bad.

Second, improving governance is hard. It is one thing to prevent rebels from sacking customs houses or stop governments from massacring their opponents; it is quite another to stamp out corruption and make government more efficient. The United States failed at its attempts to promote long-term growth.

We use the opening of the Panama Canal, which brought the seven Pacific coast countries of Latin America closer to Washington in order to strip out reverse causality or the impact of third factors. Being closer to Washington made the United States more likely to intervene but had no independent effect on countries’ political stability or government corruption.

from Vox – “New eBook: The economics of the Great War. A centennial perspective”

by Stephen Broadberry (Oxford University) and Mark Harrison (University of Warwick)

There has always been disagreement over the origins of the Great War, with many authors offering different views of the key factors. One dimension concerns whether the actions of agents should be characterised as rational or irrational. Avner Offer continues to take the popular view that the key decision-makers were irrational in the common meaning of “stupid”, arguing that “(t)he decisions for war were irresponsible, incompetent, and worse”. Roger Ransom, by contrast, uses behavioural economics to introduce bounded rationality for the key decision makers. In his view, over-confidence caused leaders to gamble on war in 1914. At this stage, they expected a large but short war, and when a quick result was not achieved, they then faced the decision of whether or not to continue fighting, or seek a negotiated settlement. Here, Ransom views the decisions of leaders to continue fighting as driven by a concern to avoid being seen to lose the war, consistent with the predictions of prospect theory, where people are more concerned about avoiding losses than making gains. Mark Harrison sees the key decision makers as acting rationally in the sense of standard neoclassical economic thinking, choosing war as the best available option in the circumstances that they faced. For Germany and the other Central Powers in 1914, the decision for war reflected a rational pessimism: locked in a power struggle with the Triple Entente, they had to strike then because their prospects of victory would only get worse.

Full post at https://voxeu.org/article/new-ebook-economics-great-war-centennial-perspective

Winning the capital, winning the war: retail investors in the First World War

by Norma Cohen (Queen Mary University of London)

 

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National War Savings CommitteeMcMaster University Libraries, Identifier: 00001792. Available at wikimedia commons

The First World War brought about an upheaval in British investment, forcing savers to repatriate billions of pounds held abroad and attracting new investors among those living far from London, this research finds. The study also points to declining inequality between Britain’s wealthiest classes and the middle class, and rising purchasing power among the lower middle classes.

The research is based on samples from ledgers of investors in successive War Loans. These are lodged in archives at the Bank of England and have been closed for a century. The research covers roughly 6,000 samples from three separate sets of ledgers of investors between 1914 and 1932.

While the First World War is recalled as a period of national sacrifice and suffering, the reality is that war boosted Britain’s output. Sampling from the ledgers points to the extent to which war unleashed the industrial and engineering innovations of British industry, creating and spreading wealth.

Britain needed capital to ensure it could outlast its enemies. As the world’s capital exporter by 1914, the nation imposed increasingly tight measures on investors to ensure capital was used exclusively for war.

While London was home to just over half the capital raised in the first War Loan in 1914, that had fallen to just under 10% of capital raised in the years after. In contrast, the North East, North West and Scotland – home to the mining, engineering and shipbuilding industries – provided 60% of the capital by 1932, up from a quarter of the total raised by the first War Loan.

The concentration of investor occupations also points to profound social changes fostered by war. Men describing themselves as ‘gentleman’ or ‘esquire’ – titles accorded those wealthy enough to live on investment returns – accounted for 55% of retail investors for the first issue of War Loan. By the post-war years, these were 37% of male investors.

In contrast, skilled labourers – blacksmiths, coal miners and railway signalmen among others– were 9.0% of male retail investors by the after-war years, up from 4.9% in the first sample.

Suppliers of war-related goods may not have been the main beneficiaries of newly-created wealth. The sample includes large investments by those supplying consumer goods sought by households made better off by higher wages, steady work and falling unemployment during the war.

During and after the war, these sectors were accused of ‘profiteering’, sparking national indignation. Nearly a quarter of investors in 5% War Loan listing their occupations as ‘manufacturer’ were producing boots and leather goods, a sector singled out during the war for excess profits. Manufacturers in the final sample produced mineral water, worsteds, jam and bread.

My findings show that War Loan was widely held by households likely to have had relatively modest wealth; while the largest concentration of capital remained in the hands of relatively few, larger numbers had a small stake in the fate of the War Loans.

In the post-war years, over half of male retail investors held £500 or less. This may help to explain why efforts to pay for war by taxing wealth as well as income – a debate that echoes today – proved so politically challenging. The rentier class on whom additional taxation would have been levied may have been more of a political construct by 1932 than an actual presence.

 

From VOX – Short poppies: the height of WWI servicemen

From Timothy Hatton, Professor of Economics, Australian National University and University of Essex. Originally published on 9 May 2014

The height of today’s populations cannot explain which factors matter for long-run trends in health and height. This column highlights the correlates of height in the past using a sample of British army soldiers from World War I. While the socioeconomic status of the household mattered, the local disease environment mattered even more. Better education and modest medical advances led to an improvement in average health, despite the war and depression.

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Distribution of heights in a sample of army recruits. From Bailey et al. (2014)

The last century has seen unprecedented increases in the heights of adults (Bleakley et al., 2013). Among young men in western Europe, that increase amounts to about four inches. On average, sons have been taller than their fathers for the last five generations. These gains in height are linked to improvements in health and longevity.

Increases in human stature have been associated with a wide range of improvements in living conditions, including better nutrition, a lower disease burden, and some modest improvement in medicine. But looking at the heights of today’s populations provides limited evidence on the socioeconomic determinants that can account for long-run trends in health and height. For that, we need to understand the correlates of height in the past. Instead of asking why people are so tall now, we should be asking why they were so short a century ago.

In a recent study Roy Bailey, Kris Inwood and I ( Bailey et al. 2014) took a sample of soldiers joining the British army around the time of World War I. These are randomly selected from a vast archive of two million service records that have been made available by the National Archives, mainly for the benefit of genealogists searching for their ancestors.

For this study, we draw a sample of servicemen who were born in the 1890s and who would therefore be in their late teens or early twenties when they enlisted. About two thirds of this cohort enlisted in the armed services and so the sample suffers much less from selection bias than would be likely during peacetime, when only a small fraction joined the forces. But we do not include officers who were taller than those they commanded. And at the other end of the distribution, we also miss some of the least fit, who were likely to be shorter than average.

FULL TEXT HERE

From The Royal Economic Society – Myths of the Great War

From issue no. 165, APril 2014, pp.17-196

 

Understandably, 2014 has seen (and will yet see) many reflections on the ‘Great War’ of 1914-18. In a lecture given to the Economic History Society Annual Conference on 28th March, Mark Harrison1 identified a number of widely-held myths about that tragic event. This is a shortened version of that lecture, which is available at: http://warwick.ac.uk/cage/research/wpfeed/188-2014_harrison.pdf.

Perceptions of the Great War continue to resonate in today’s world of international politics and policy. Most obviously, does China’s rise show a parallel with Germany’s a century ago? Will China’s rise, unlike Germany’s, remain peaceful? The Financial Times journalist Gideon Rachman wrote last year:

The analogy [of China today] with Germany before the first world war is striking … It is, at least, encouraging that the Chinese leadership has made an intense study of the rise of great powers over the ages – and is determined to avoid the mistakes of both Germany and Japan.2

The idea that China’s leaders wish to avoid Germany’s mistakes is encouraging, certainly.3 But what are the ‘mistakes’, exactly, that they will now seek to avoid? The world can hardly be reassured if we ourselves, social scientists and historians, remain uncertain what mistakes were made and even whether they were mistakes in the first place.

In this lecture I shall review four popular narratives relating to the Great War. They concern why the war started, how it was won, how it was lost, and in what sense it led to the next war.

Full article here: www.res.org.uk/view/art6Apr14Features.html