The Impact of Unsuccessful Pirate Attacks on Financial Markets: A Confirmation of Leeson's Reputation-Building Theory

Abstract

This paper examines the effect of unsuccessful Somali pirate attacks on financial-market returns in the Arabian Peninsula. Specifically, it tests Peter Leeson's (2010a) reputation-building theory of pirate behavior. According to this theory, unsuccessful pirate attacks create the expectation of future pirate attacks, as pirates attempt to maintain and build their reputation for effective piracy. We test this theory empirically by studying the relationship between pirate attacks and financial-market returns in the Arabian Peninsula. The result of our empirical test supports Leeson's theory: unsuccessful pirate attacks are associated with lower financial-market returns, suggesting that market participants expect unsuccessful pirate attacks to be followed by future pirate attacks.