A Financial Anatomy of Economic Sanctions

Abstract

This paper is the first comprehensive analysis of economic sanctions and measures the effect of imposing and lifting sanctions on the target country's exchange-listed, publicly traded firms and examines how the impact of sanctions on deep state-owned firms differs from their impact on other firms. The paper uses the case of Iran because of its developed financial markets, the length and variety of sanctions, the significant presence of deep state firms in the market, and the unique event of the 2015 nuclear deal which led to lifting some of the imposed sanctions. I find that a direct sanction against a firm or industry leads to cumulative short-term and long-term negative abnormal returns. The effect is stronger for the deep state firms. In the case of multiple sanctions against a firm by different jurisdictions, the effect of the first sanction is the strongest one. This may hint that the widely-held belief that unilateral sanctions are not effective is not necessarily true. The removal of sanctions leads to positive abnormal returns; the positive abnormal returns are weaker for the deep state firms. Firms targeted by economic sanctions decrease their leverage and increase their cash holding to manage their increased risk, and economic sanctions worsen profitability ratios. The paper provides valuable insights into the mechanics of economic sanctions and backs them with robust quantitative analysis.