Terror threat and investor sentiment: International evidence

Abstract

Terrorism remains a persistent threat to global peace and stability, but its impact extends beyond the realm of security. We examine the impact of terrorism on the important capital market transaction of initial public offerings (IPOs). Consistent with the notion that terrorism dampens investor sentiment, we reveal robust evidence that first-day returns are lower in countries with higher Global Terrorism Index scores. Examining this issue at an international scale allows us to advance the literature in two important ways. First, we provide direct evidence that greater terror threat is associated with lower investor sentiment. Second, we determine that strong democratic principles, high-quality governance institutions, and transparent accounting disclosures moderate the negative impact of terror threat on investor sentiment and IPO returns.