This is the question a recent study by Professor Dimitris Petmezas and colleagues from Manchester Alliance Business School and Surrey Business School sought to answer.
The study used terrorist attacks as an example of how exogenous shocks can impact the local business economy due to the uncertainty they leave in their wake. The researchers observed the mergers and acquisitions (M&A) activity of firms located in and around the locations of a sample of terrorist attacks in the USA between 1995 and 2015.
The attacks selected for the study were all heavily covered by major newspapers at the time, and rated on their severity by the researchers based on the number of human casualties they caused.
They then used Metropolitan Statistical Area (MSA) information and physical distance to measure each firm’s geographic proximity from the attacked locations.
Several negative consequences were revealed for firms located near to terrorism-stricken areas when it comes to M&A. Professor Petmezas and colleagues stating that:
A key element to all this is human capital, which becomes a source of terrorism-induced uncertainty which increases the real option value to delay M&A investments.
“We offer two non-mutually exclusive arguments related with target firm human capital and acquirer CEO uncertainty and fear. We initially show that terrorism intensity leads to a decrease in firm labour productivity.
Additionally, we show that the negative impact of terrorism intensity on acquisitions is more pronounced for firms which are highly dependent on human capital. The results also suggest that personal uncertainty and fear affect acquirer CEOs' bid decisions.” Professor Petmezas.