DP5076 Is Political Risk Company-Specific? The Market Side of the Yukos Affair
Authors: Alexei Goriaev (New Economic School/CEFIR, Moscow) and Konstantin Sonin (Institute for Advanced Study, Princeton, New Economic School/CEFIR, Moscow and CEPR)
Political risk is a salient feature of emerging markets. The Yukos affair, a high-profile story of the state-led assault on a private Russian company, provides an excellent opportunity for an inquiry into the nature of company-specific political risks in emerging markets. The authors of CEPR Discussion Paper No. 5076 examine the role of the state as the main threat to the property rights of private entrepreneurs and focus on the actual mechanism of a single predation episode. They investigate how the involvement of the state agencies affected stock market performance of Yukos and other Russian companies during the first months of the state's assault on Yukos. They examine the factors that could explain the differences in other companies' stock price reaction to the Yukos events. Their analysis is based on 53 events in which Yukos has been mentioned along with one of the state agencies from January 2002 to November 2003.
The results of this study provide strong evidence that the involvement of state agencies, in particular law enforcement agencies, is still a very important company-specific factor affecting returns in the Russian stock market. Negative events associated primarily with law enforcement agencies' actions against the company's employees caused significant drops in the Russian markets' stock prices, with daily abnormal returns in the order of -1.1%. This effect was especially pronounced in the case of major events, such as the arrest of Yukos' top managers, when the single-day price drops were up to 15% and the abnormal return was in the order of -10%. Both positive and negative news about personal charges and arrests implied a significant increase in the company's systematic risk, as other companies' stock prices also reacted strongly to Yukos events.
Writing in 2004, Willem Buiter, then Chief Economist of the European Bank of Reconstruction and Development, observed that 'the Yukos affair is a timely reminder of the vulnerability of property rights acquired through a privatization process that lacks legitimacy'. The findings of this study are consistent with the view that property rights face a higher risk of expropriation through the use of such political instruments as selective tax enforcement.