In the aftermath of the financial crisis the world saw an increase in the number of street protests. Many inspired by perceived connections between the political elite and business interests; Occupy Wall Street and Los Indignados in the west to the Arab Spring and the protests against Victor Yanukovich in Ukraine. A new working paper from the National Bureau of Economic Research presents evidence on their power.
Daron Acemoglu, Tarek Hassan and Ahmed Tahoun examines the correlation between street protests in Egypt and the stock market returns for firms connected to former president Hosni Mubarak’s National Democratic Party (NDP), the Muslim Brotherhood and the Egyptian military.
On average they found that a turnout of half a million protestors in Tahrir Square lowered the market valuation of companies connected to the incumbent by 0.8 per cent relative to non-connected firms.
The theory goes that companies with political connections can use them to extract a ‘rent’ — the term referring to a surplus that someone can capture beyond the productive value of their input due by gaining a privileged position. As the relative fortunes of the three political groups in Egypt waxed and waned different companies saw new opportunities to become rent seekers.
In the nine trading days after Hosni Mubarak’s fall the valuation of NDP-connected companies fell by an average of 13 per cent. And they found evidence that companies were aware of the value of their political connections; companies would change the composition of their boards, hiring military officers and firing NDP members during military rule.
The analysis exploits the daily variation in the timing of street protests and stock market returns to look solely at the role of mass demonstrations on the political power of different groups.
They find a systematic relationship. During the period following the removal of Mohammed Morsi they find that protests in Tahrir, a centre for anti-islamists would harm Muslim Brotherhood-connected firms but pro-islamist protests in Rabaa square would raise their valuation.
One plausible critique of their findings is that these protests were only outgrowths of public opinion and had no causal impact on their own, instead the crucial mechanism was public outrage not protest.
The authors use data from twitter to test this theory. Social media activity predicted protests but had no impact on the relative stock market returns of connected companies. The only thing that mattered for actual shifts in power was what was happening on the street.
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