Is Bad News Ever Good for Stocks? The Importance of Time-varying War Risk and Stock Returns

Abstract

With two news-based measures on war, I document that managers mitigated war risk through dividend cuts, arguably to establish a war chest. Moreover, I find that companies postponed their initial public offerings and that foreign companies were more likely to delist after the onset of wars. Investors reacted negatively to the increase in war news coverage. There is evidence of mean-reversion after a threat of war and a negative drift following an act of war. Finally, I highlight the importance of proximity to military conflicts. In general, the evidence indicates that both managers and investors became more risk averse as a consequence of war news.