Is Something Really Happening? Separatist Movements in Modern Democracies and the Stock Market: The Case of Catalonia

Transcription

1 Is Something Really Happening? Separatist Movements in Modern Democracies and the Stock Market: The Case of Catalonia Iván Mauricio Durán * Francesc Trillas February, 2016 Abstract This paper analyzes how the political uncertainty related to the Catalan separatist movement from 2010 to 2015 aect the stock returns of a portfolio of rms exposed to such political risks. To do so, we carry out several event studies, which is a methodology quite used in nance and more recently in social sciences to evaluate the eect of some events on rms. We nd that events associated to announcements by politicians do not have any eect on stock prices. Instead, events associated to street demonstrations aect negatively stock returns of both Catalan and Spanish rms, the events against the separatist movement had a negative eect on Catalan rms, and there are some ambiguous eects of the 27S plebiscite on Spanish rms. However, all the eects are economically small, and are very below the ndings of other case studies. Key Words: Event Studies, Catalonia, Stock Market JEL: * Department of Applied Economics, Universitat Autònoma de Barcelona Department of Applied Economics, Universitat Autònoma de Barcelona 1

2 1 Introduction The economic costs associated to both internal and external violent conicts have been well documented by literature (Garnkel and Skaperdas, 2007; Blattman and Miguel, 2010). Not all political conicts, however, end up becoming violent, but many are instead maintained in the realm of non-violent political strains. For instance, several current political tensions related to demands over sovereignty lies on this non-violent category. That is the case of regions such as Scotland, Quebec, Veneto, Taiwan, and Catalonia, where there have been harsh political tensions in the last years that not necessarily turns into violent conicts. While it is evident that human and physical capital destruction as well as political uncertainty associated to violent conicts can have strong negative eects on economic activity, the consequences of peaceful conicts, such as those arising from sovereignist movements, turn out to be less evident, specially when it comes to democracies highly consolidated with strong and reliable institutional frameworks. Economic costs of either violent or non-violent political conicts can be addressed from distinct perspectives, depending on how economic value is dened. A large body of literature has focused on analyzing the eect of surprising violent events on stock prices (Abadie and Gardeazabal, 2003; Chen and Siems, 2004; Zussman and Zussman, 2006; Guidolin and Ferrara, 2005, 2007; Castells and Trillas, 2013; Acemoglu et al., 2014). This approach relies on the assumption of ecient markets according to which share prices should reect all available information, including any economic or social event. Therefore, if conict affects the economy, then events related to conicts should be accompanied by changes in stock prices (Gardeazabal, 2012). Although imperfect, rm stock returns are a good measure of economic value, and, furthermore, assuming that political events are exogenous, this approach can be methodologically suitable for identifying the eect of political conicts on economy. By drawing on an event study methodology, this paper is intended to examine the eect of a variety of political events related to the Catalan separatist movement on the stock returns of rms exposed to such political events between 2010 and If such political events are consider as credible by investors and having a negative impact on the Catalan economy, stocks of rms highly exposed to the Catalan economy should have shown a negative performance relative to rms less exposed to the Catalan economy. As Guidolin and Ferrara (2005) point out, such a task is of importance not only to nancial economists (who typically study the way in which news are compounded into equilibrium prices), but also to social scientists who may be interested in deciphering the economic eects of this kind of non-violent conicts in order to understand the complex relations between politics and economy in the real world today. This paper is related to some recent contributions that have explored the eects of sovereignty conicts on stock returns. In particular, He et al. (2015), examining the case of Taiwan's sovereignty tension, nd that non-violent events harming the relationship between Taiwan and mainland China lead to an average daily drop of 200 basis points in Taiwanese stock returns. The impact is 2

3 more severe on rms openly supporting the Taiwanese pro-independence party. Another interesting contribution in this eld was by Beaulieu et al. (2006). They investigate the short run eect of the October 30th, 1995 Quebec referendum on the common stock returns of Quebec rms. Their results show that the uncertainty surrounding the referendum outcome had an impact on stock returns of Quebec rms, and this eect varied with dierent degrees of political risk exposure. Also, Baker et al. (2015), using a time series methodology, nd evidence that policy uncertainty in the US related specically to presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over scal policy raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction. Nevertheless, analyzing the Catalan separatist movement turns out to be relevant since it can bring new insights on the eect of political tension on economy. First and foremost, the case of Catalonia diers widely from Beaulieu et al. (2006) because we do not center on a unique event (the October 30th, 1995 Quebec referendum), but instead we analyze a broader set of events that, moreover, has not been solved yet. Also, it diers from He et al. (2015) because we do not just take all events as a whole, but we classify them and assess whether they have a dierent eect on stock returns of rms. Secondly, the case study of Catalonia is quite dierent from He et al. (2015) because of some important facts: Chinese economy is enormous in comparison to Taiwan (Taiwan's GDP is about 0.06% of China's), while Catalonia and the rest of Spain have similar economic sizes (Catalonia s GDP is about 19% of Spain's). Further, although the mainland China-Taiwan conict is developed in a diplomatic arena, the risk of war cannot be discarded (He et al., 2015, p. 3); by contrast, the possibility of a military intervention is much less probable for the case of Catalonia and Spain. In a nutshell, this paper contributes to the literature on economic eects of policy uncertainty related to sovereignty strain by analyzing a current salient case study which is characterized by diverse and frequent political events during a long period, and between two regions of two similar economic size with little risk of violent intervention. And least but not less, in terms of policy debate this paper also contributes to a more case-specic literature on the economic eects of the Catalonia secession, which turns out to be of great relevance given the importance of both the Spanish and Catalan economy in the European context. Providing empirical evidence about the eect of such political events on stock returns can be also a manner of assessing whether the Catalan separatist movement is perceived as credible by investors, and if so, if has a sizable and signicant eect on economy. The results show that the Catalan separatist movement, as a whole, has not had a signicant eect on the stock returns neither of Catalan nor Spanish rms. Although the Spanish and Catalan political agenda has been dominated by this issue in the last years, general results provide some insights about the lack of credibility of the movement by investors. Street demonstrations are the only type of event that has shown having a negative eect on stock returns of 3

4 Catalan rms. However, this eect does not seem to be economically signicant as it is too small, specially in comparison to ndings by other case studies. Perhaps, this is so for the strength of the institutional framework under which the movement has been developed. That is, the Catalan separatist movement has not been perceived as credible because has happened in a modern democracy that belongs to a strong institutional structure such as the European Union. In this context, investors can believe that Spain has the capability to handle with this conict in a reasonable and inexpensive manner. This papers is structured as follows. Section 2 provides a brief contextualization of the case study. Section 3 presents a theoretical framework to understand the reaction of stock returns to news and provides the research hypothesis. Section 4 explains the data. Section 5 puts forward the empirical strategy. Section 6 focuses on explaining the econometric results. And lastly, Section 7 oers a brief nal discussion. 2 Case Contextualization Since Catalonia became part of Spain in the early 18th century, this region has always had a rather strained relationship with the rest of Spain regarding its sovereignty. More recently, in order to force Catalans to leave aside their native language and nationalist symbols, Catalonia undergone repression under Franco dictatorship during the 20th century, which led to an greater demand of more autonomy or even total independence once democracy came again. Parallel to this long-standing tension over sovereignty, Catalonia also became one of the most thriving economies in Spain, exhibiting for a long time economic growth rates above the national average and providing therefore a high living standard for its inhabitants. Since the 2008 Great Recession, however, Catalan economy -as Spanish economy in general- started to show symptoms of severe downturn. In fact, Catalonia was one of the hardest hit regions in Spain. Interestingly, parallel with the economic crisis an increasing dissatisfaction with the political status of Catalonia within Spain became more acute as though the lack of political and economic autonomy were perceived as being the responsible for the deepening of the crisis and the subsequent slow recovery. According to gures from the Centre for Sociological Research (Centro de Investigaciones Sociológicas), the percentage of individuals who feel only Catalan increased from 14.4% in 2010 to 25.1% in In fact, economic discussion in today's Catalonia orbits in a great extent on the need of a scal restructuring in order to obtain major scal autonomy. Like most other regions Catalonia has the status of an Autonomous Community (Comunidad Autónoma), while the Basque Country and Navarre have had the status of a so-called Comunidad Foral since 1979 and 1982, respectively. This special status not only grants a much higher degree of scal autonomy, but also accords preferential treatment within the horizontal equalisation scheme between regions (Zipfel et al., 2015, p. 7). In the light of these facts, an independence movement began to take shape 4

5 since approximately shortly after the inception of the 2008 economic crisis. The exact background of this recent movement can be traced back to the symbolic voting for independence realized in the small town Arenys de Munt in 13 September 2009, which was replicated by 167 municipalities more in December 13th in the same year. Subsequently, since 2010 a tug of war for Catalonia independence started between this region and Spain, leading to a variety of events such as street demonstrations, announcements by politicians demanding absolute sovereignty over Catalonia, referendums and plebiscites. Amongst all events related to independence in the last years, it can be said that two important calls for citizen consultation are the most relevant. Artur Mas, leader of the Catalan nationalist and pro-independence political coalition Convergència i Unió (CiU) and president of the Catalan government (Generalitat) from 2010 to 2015, in coalition with others independence forces such as Esquerra Republicana de Catalunya (ERC) and Candidatura d'unitat Popular (CUP), began a legal crusade to get the independence by means of a referendum. In particular, the 9N (short form of 9 November, 2014) was a referendum for independence which was declared unconstitutional by the Spanish government nine month before, in February Despite that, 2.3 millions of voters (37% of the electorate) went to vote, of which 1.86 millions (81%) expressed their agreement with the Catalonia independence. Almost one year later, in 27S (short form of 27 September 2015), regional parliamentary election were held in Catalonia, which was taken as a plebiscite for independence by a coalition of independence parties called Junts pel Sí, which was made of CiU and ERC, and subsequently with the support of the CUP. Even though they obtained an absolute majority in parliament seats, they did not get it in votes (47,8%: Junts pel Sí plus CUP). In turn, the processes for both 9N and 27S were accompanied by street demonstrations, specially in the Catalan National Day (Diada in Catalan), celebrated every year in September 11th, and a range of announcements by politicians and media analysts with respect to the viability of the referendums as well as the will and the right of Catalans about deciding the independence from Spain. In early 2016, Artur Mas was unable to maintain the majority in the Catalan Parliament, and then was removed from oce. However, the new President, Carles Puigdemont, is considered as having the same independence purpose, thus tension over sovereignty is expected to continue much longer. Along with the strengthening of the separatist movement in Catalonia, an intense debate on the future consequences of secession on Catalan economy has been emerging. On the one hand, some scholars claim that despite the initial policy uncertainty that would emerge from independence, Catalonia would benet from it. For instance, a group of leading Catalan social scientists (mostly economists and political scientists) grouped in the Col lectiu Wilson 1 discuss regularly in media and blogs on the possible benets of independence. In the same vain, Ayadi et al. (2015) claims that under any possible simulated scenario, whether it be a negotiated or non-negotiated independence, Catalan secession from Spain will be benecial for Catalonia in the long run, reecting to a large 1 See 5

6 extent the positive impact from terminating Catalonia's net scal transfers to the rest of Spain (Ayadi et al., 2015, p. 71). On the other hand, some media and several analysts highlight the possible negative consequences of independence for Catalan economy, which are presumably being evident for the alleged move of Catalan enterprises to other Spanish regions. 3 Theoretical Framework An eventual consolidation of the Catalan separatist movement may congure a scenario of policy uncertainty for those rms highly exposed to these events. Policy uncertainty is a type of economic risk where the future path of government policy is not clear, raising risk premia and leading businesses and individuals to delay spending and investment until this uncertainty has been resolved (Baker et al., 2015). Thus, if nancial markets are ecient, asset prices should reect policy uncertainty associated to the Catalan separatist movement. Formally, all assets carry a positive value insofar as they will produce positive, possibly uncertain, cash ows at some future date. Such cash ow takes the form of an explicit monetary payment in the case of nancial markets: stocks pay uncertain dividend streams. In any event, such future, uncertain cash ows need to be discounted to the present in order to nd the price of the underlying asset. The discount rate is best seen as time dependent and uncertain, apt to reect the underlying riskiness of the cash ows to be discounted, i.e., it will generally incorporate a risk premium that reects the risk aversion of market participants. According to Guidolin and Ferrara (2005), we can summarize these considerations in the following pricing formula for a generic asset characterized by future, uncertain cash ow stream {C t+j } H j=1 : P t = H j=1 E t [C t+j ] Π H j=1 (1 + rf + E t [π t+j ]) Where E [ ] denotes the expectation operator conditional on F t, that is the information available at time t, r f is the constant riskless interest rate, and π t+j 0 is the future, uncertain risk premium required on the asset under consideration. H can be arbitrarily large, and in principle extend into the innite future, like in the case of stocks. A piece of news like the onset of a political tension consists of a change in the information set F t that therefore goes (say) from F t 1 to F t. The news will aect the price of the asset through two channels: the sequence of expected, future cash ows {E t [C t+j ]} H j=1 is updated, and the sequence of future risk premia {E t [π t+j ]} H j=1 also gets updated. This implies a change in the price of the asset, P = P t P t 1. In particular, an eventual separation of Catalonia could lead to changes in the cash ows and risk premia of rms for two reasons: Firstly, those rms with a signicant part of their business in Catalonia might experience uncertainty 6

7 associated with the scal, trade, migration and investment policies, such as a tax increase to nance the transition costs, the status of the European agreements or the moves of head oces from Catalonia to another Spanish or European province, among others. Secondly, rms that not necessarily have a signicant part of their business in Catalonia but are considered by people as Catalan rms, might experience a consumer's boycott in the rest of Spain. Such boycott of Catalan rms have been largely documented by media in the past years. On the other hand, the consolidation of some pro-independence political parties (even thought separation is not to achieved), might yield policy uncertainty for some rms through political connections. Based on this theoretical framework and the particularities of the Catalan case, we hypothesize that, if the Catalan separatist movement is perceived as credible: H1: Events that demonstrate progress of the Catalan separatist movement have a negative eect on stock returns of rms more exposed to the Catalan economy. H2: Events that slow or block the progress of the Catalan separatist movement have a positive eect on stock returns of rms more exposed to the Catalan economy. H3: Amongst all pro-independence events, those related to the 27S plebiscite have a bigger impact than 9N referendum since it was considered more credible. 4 Data 4.1 Political Events Related to the Catalan Separatist Movement The study covers political events related to the Catalan separatist process between January 1, 2010, to December 31, According to the case contextualization, this period corresponds to an increased conict over sovereignty between Catalonia and Spain, conict that maintains unresolved until the end of the analysis period. In the aggregate, we counted 31 events, but not all of them can be considered as having the same characteristics. Table 1 shows that events can be roughly classied in two categories: i) Events that favour the separatist process (22 events), and ii) Events against the separatist process (9 events). In turn, the former is made up of dierent types of events: announcements by politicians regarding the viability of the independence process, specially those related to the referendum of November 9, 2014 (10 events) and the plebiscite of September 27, 2015 (5 events); and street demonstrations and Diadas (7 events). Except for the referendum of November 9, 2014, which was declared unconstitutional some weeks ago of being celebrated, all of these events involve uncertainty over the political future of Catalonia. With respect to the announcements, they have been surprising and have marked the road of the process, thus they can be considered as involving uncertainty. With respect to the street demonstrations, despite being predictable in terms of 7

8 the date, they have been somehow unpredictable in terms of their magnitude. On the other hand, events against the separatist process correspond to announcements by either Catalan or Spanish politicians concerning the impossibility of carrying out key events related to independence such as 9N or 27S, and also events related to the politician Jordi Pujol's corruption scandal, which could have undermined the credibility of the separatist movement since he was one of the precursors of the recovery of the Catalan identity and the independence movement since the early 80's. In sum, Table 2 explains ve dierent aggregations for the sake of analysis: 1) Total Events Pro, 2) Total Events 27S, 3) Total Events 9N, 4) Total Street Demonstrations, and 5) Total Events Against. Moreover, due to their relevance during the Catalan separatist movement, we will also analyze four particular events: 1) Post 27S, 2) 27S Day, 3) 9N Day, and 4) Pujol Scandal. 4.2 Economic Data Using Datastream database, we construct daily stock returns for the period of analysis (January 1, 2010, to December 31, 2015) for rms registered in the Barcelona Stock Market. This is therefore our dependent variable. Additionally, we collect yearly information on assets and leverage (total debt over assets) in order to control for the size of rms, and we also include the Morgan Stanley Capital International (MSCI)-world index to control for the eect of changes or volatility in the stocks of developed markets in the world on the Spanish stock market. Considering the availability of information, the nal sample is of 154 rms, which will be classify into two dierent portfolios according to the degree of exposure to Catalonia. 4.3 Portfolio of Firms Exposed to the Catalan Economy In order to dene a portfolio of rms exposed to the Catalan economy and, therefore, to the risk arising from the Catalan separation movement, one could use rms headquartered in Catalonia as an approximation of such exposure. As seen in Table 3, 27 rms are headquartered in Catalonia whereas 127 are not. Nevertheless, as Abadie and Gardeazabal (2003) point out, a classication that relies solely on companies' registered addresses is problematic. Registered addresses are sometimes chosen for historic, convenience, or tax-related reasons and do not necessarily imply that the company has an important presence in the area. Unfortunately, data on geographical location of rms' activities are rarely available. Recognizing that registered addresses are not enough to capture the economic interest of companies in a specic geographical area, and given that information about economic activities of rms in Catalonia is not available, we resort to an alternative measure based on Google searches. A recent literature has taken advantage of internet search engines such as Google to measure some phenomena. For instance, Baker et al. (2012) and Donadelli (2015) propose google-search-based policy uncertainty indexes for the US, relying on the 8

9 volume of internet searches based on some key words. In the same vein, we propose therefore an indicator of the association between rms and Catalonia based on the volume of Google searches. By doing three distinct searches combining the name of the rm and the word Catalonia in three dierent languages (English, Spanish and Catalan), we found an approximation of the extent of association between rms registered in the Barcelona stock market and Catalonia. Firms are then splitted into two groups: those above (more exposed to Catalan market) and below (less exposed to Catalan market) the average of this Google search-base measure. As seen in Table 3, 84 rms are above the average of the indicator whereas 70 are not. 5 Empirical Strategy Event studies are a widely-used methodology in nancial economics to measure the economic impact of a specic event on the value of rms over a relatively short time period (Beaulieu et al., 2006, p. 8). In this paper, we use a multivariate linear regression framework similar to that used in He et al. (2015) and Acemoglu et al. (2014). The main advantage of this approach is that it enable to incorporate important controls and xed eects that can strengthen the identication strategy. The basic regression equation is of the following form: y ite = β o + β 1 Events te + Controls ite + η i + γ t + ε ite Where y ite is daily percentage return for stock i on the day t of event e. As usual in event studies, we rst need to dene temporal windows through which we can estimate the eect of political events on stock returns. First of all, the event window, which is the day or group of days when the political event takes place and stock markets are likely to incorporate changing expectations, is dened as the day of the event t = 0 and the following day t = 1, that is [0, 1]. Incorporating some days after the event happens is a common practice in event studies since allow us taking into account potentially lagged reactions and that an event may arrive late in the day when markets are closed. Secondly, the estimation window, which are pre-event days over which normal returns of rms can be estimated, spans 20 days before the political event, that is the period [ 20, 1]. The relatively short estimation window is because of the high frequency of salient events in Catalonia around some events under consideration. Thus, Events te, the main independent variable, is a dummy that takes on 1 in the event window [0, 1], and 0 for the estimation window[ 20, 1]. Both event window and estimation window constitutes then the event period t. The coecient β 1 is thus expected to capture the eect of political events on daily percentage return by estimating the dierence in the stock returns of rms between the event and estimation window. For each political event, we use several event windows since it is plausible that some events arrive even later, which justies to extend forward the event 9

10 window, and others can be anticipated, which justies to extend backward the event window. Thus, we also check the eect of political events on stock returns two days after the event date [0, 2] and three days after the event date [0, 3], i.e event periods of [ 20, 2] and [ 20, 3] respectively. Furthermore, we take into account possible anticipation of events using an event window starting from one day before the event date [ 1, 1], and we also consider anticipation when events have not happened yet using an event window of two previous days [ 2, 1]. In all specications, we control for rm xed eects (η i ) and period xed eects (γ t ). η i absorbs the unobserved heterogeneity amongst rms, and γ t absorbs the unobserved heterogeneity amongst event periods. Thus, the estimated coecients report the impact of political tension on stock returns within the corresponding event periods. We further include time-variant rm controls such as yearly assets and leverage (total debt over assets) in order to control for the size of rms, and the MSCI-world index to control for the eect of changes in the stocks of developed markets on the Spanish stock market. In all specications, we also allow the error term (ε iet ) to be correlated across time for any given rm. Finally, this regression is run separately for two portfolios of rms by using a Google search-base measure: those more exposed to political risk associated to the separatist movement in Catalonia and those less exposed, which for the sake of simplicity are labeled as Catalan and Spanish rms, respectively, and for ve distinct group of events: 1) Total Events Pro, 2) Total Events 27S, 3) Total Events 9N, 4) Total Street Demonstrations, and 5) Total Events Against. The analysis of some particular events is somewhat dierent and more simple. The regression equation is of the following form: y it = β o + β 1 Events t + Controls it + η i + ε it Where y it is daily percentage return for stock i on the day t. Note that we do not need to index with e since we have only one event in this case. Thus, Events t takes on 1 the day of the event and 0 in the estimation window. We use the same event and estimation structures as explained above. It is also worth noting that we do not need to introduce period xed eects γ t neither rm controls like assets and leverage (total debt over assets) because they vary yearly, then yearly controls are already captured by rm xed eects η i. We run this regression for four particular events: 1) Post 27S, 2) 27S Day, 3) 9N Day, and 4) Pujol Scandal. The identication assumption in this specication is the exogeneity of each event, which brings about an unexpected, sudden and one-time increase in political tension. Certainly, when looking at macro level, it is possible that the poor performance of the Spanish and Catalan economies since the 2008 Great Recession has triggered the Catalan separatist movement, which leads to an endogeneity problem. However, in an event study framework using daily data of stock returns, each event is plausibly exogenous because it is not expected that sudden changes in the daily stock returns of rms lead to the occurrence of events related to the Catalan separatist movement, but it is the other way around. 10

11 6 Results In general, it can be said that the three hypothesis posed in this research are rejected leading to unexpected but not less interesting results. First hypothesis is rejected as total pro separatist events did not have any statistical signicance eect on stock returns of Catalan rms. The second hypothesis is also rejected since events against the Catalan separatist process show a signicant negative eect instead of a positive one. Finally, third hypothesis is also rejected because the street demonstrations are the only type of event that show some clear and negative eect on stock returns. Table 4 shows the results for the basic event study specication, i.e. one with period window of[ 20, 1], which comprises an estimation window of [ 20, 1] and event window of [0, 1]. In particular, Column 1 shows that there is not statistical evidence to claim that political events in favour of the Catalan separatist movement as a whole aected the stock returns, nor of Catalan and Spanish companies. When disaggregating events, we observe that neither those related to 27S (Column 2) have any eect, and those related to 9N (Column 3) had a positive eect on Catalan rms. More interestingly, events related to street demonstrations (Diadas) have a negative eect on stock returns of both Catalan and Spanish companies (Column 4). This eect is a drop about percentage points for Catalan rms and for Spanish rms, which is not economically as large as others founded by previous studies. For instance, using a comparable methodology He et al. (2015) report an eect of 2.03 percentage points for Taiwanese rms. Berkman et al. (2011) nd a more modest 0.12 percentage points reduction in monthly world stock returns. Fisman et al. (2014) report that the Nikkei 225 Index fell following an adverse shock to Sino-Japanese relations in 2005 by cumulatively 6.1% over the following month. Lastly, studies focusing exclusively on the eects of violent conicts document a relatively smaller response. Wolfers and Zitzewitz (2009) estimate a 1.50% decline in U.S. stock price in the run-up of the Iraq invasion in 2003 and Zussman and Zussman (2006) relate assassinations of senior political targets to a % daily drop in the Israeli stock index. Finally, it is also interesting noting that those events against the separatist movement also had a negative eect, but just on Catalan rms (Column 5) and the size of the eect is also quite small, between and percentage points for Catalan rms. As mentioned in Section 5, it is necessary to check the eect of political events on stock returns through several event windows at least for two reasons: some events can have a lagged eect (which it justies to extend forward the event window), and others can be anticipated (which it justies to extend backward the event window). When looking at distinct event windows specications in Table 5, we conrm that the total events pro separatist movement did not have any signicant eect on stock prices (Column 1). Nevertheless, there seem to be a positive anticipatory (event window[ 2, 1]) eect of total 27S plebiscite events on stock returns of both Catalan and Spanish rms (Column 2). After that, however, there is no any eect on Catalan rms and the positive eect on Spanish rms continues for some days more. On the contrary, there seem 11

12 to be a negative anticipatory eect of total 9N referendum events on stock returns of both Catalan and Spanish rms (Column 3). After that, there is a positive impact on Catalan rms once the event has happened. The most interesting result over time, however, turns out to be such related to street demonstrations (Column 4). Two days before happening, both Catalan and Spanish stock returns display a positive reaction, but there have been a negative eect extended for some days when Diadas occur. Finally, contrary to what is proposed in the second hypothesis, events against the Catalan separatist movements exhibit a negative eect on stock returns of Catalan rms (Column 5). When analyzing some particular events we also nd interesting results. In particular, the events labeled as 27S Day and Post 27S present some apparent contradiction that t very well with actual facts. As explained in the contextualization, the results of 27S plebiscite was quite controversial since Catalan nationalist politicians and media interpreted the results as a victory of the separatist movement, but, at the same time, Spanish politicians and other media saw the same results as a failure of the separatist movement. This controversy can be somehow seen in the results (Tables 6 and 7). The 27S day, celebrated in September 27, 2015, had a positive eect on Spanish rms, but some days later, specically in November 9, 2015, there was a negative eect on Spanish rms when Junts pel sí and the CUP -political organizations that interpreted the 27S plebiscite results as a victory- approved a resolution that declares the beginning of the process of creating independent Catalan state as a republic. Then, it turns out to be curious how Spanish rms reacted so dierently to these two closely related events and why Catalan rms did not react. 7 Final Discussion The Catalan separatist movement, as a whole, has not had a signicant eect on the stock returns neither of Catalan nor Spanish rms. Although this political conict has been in the top of the political agenda of both Catalonia and Spain in the last years, this general result provides some insights about the lack of credibility of the movement by investors. Street demonstrations are the only type of event that has shown having a negative eect on stock returns of Catalan rms. However, this eect does not seem to be economically signicant as it is too small, specially in comparison to ndings by other case studies. Perhaps, this is so for the strength of the institutional framework under which the movement has been developed. That is, the Catalan separatist movement has not been perceived as credible because has happened in a modern democracy that belongs to a strong institutional structure such as the European Union. In this context, investors can believe that Spain has the capability to handle with this conict in a reasonable and inexpensive manner. It calls attention, however, that events around 27S seem to have an ambiguous eect on Spanish rms: for the day of the 27S plebiscite, Spanish rms reacted positively for several days, but after the announcement of agreement be- 12

13 tween Catalan nationalist political organization two weeks later, Spanish rms reacted negatively. This ambiguity reects that both parts in conict (both Catalan separatist and Spanish) believed to be triumphant due to the ambiguity of the interpretation of these results. It is also curious why Spanish rms reacted and Catalan rms not. This only answer that we can provide so far is that during the 27S events the movement was credible in the rest of Spain, but not in Catalonia. Another interesting result that requires an explanation is the negative impact of events against the movement on Catalan stock returns. A possible interpretation is that although these events were supposed to slow or block the process, they were perceived as counterproductive. That is, they were perceived as a fuel for the Catalan separatist movement that would react strongly to these grievances coming from the central Spanish government, grievances in the sense that Spanish government did not permitted the free development of a consultation for getting the independence in a legal and rapid manner. 13

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15 Guidolin, M. and Ferrara, E. L. (2005). The economic eects of violent conict: Evidence from asset market reactions. Working Papers , Federal Reserve Bank of St. Louis. Guidolin, M. and Ferrara, E. L. (2007). Diamonds are forever, wars are not - is conict bad for private rms? American Economic Review, 97(5): He, Y., Nielsson, U., and Wang, Y. (2015). Hurting without hitting: The economic cost of political tension. Toulouse School of Economics and Copenhagen Business School. Wolfers, J. and Zitzewitz, E. (2009). Using markets to inform policy: The case of the iraq war. Economica, 76: Zipfel, F., Vetter, S., and Pietzker, D. (2015). Better o on their own? economic aspects of regional autonomy and independence movements in europe. Technical report, Deutsche Bank Research. Zussman, A. and Zussman, N. (2006). Assassinations: Evaluating the eectiveness of an israeli counterterrorism policy using stock market data. Journal of Economic Perspectives, 20:

16 Annex Table 1: Chronology and typology of events related to the Catalan separatist movement Date Type Description 9 November, Announcement Junts pel Sí and the CUP approved a 2015 resolution that "solemnly declares the beginning of the process of creating independent Catalan state as a republic" 27 September, Plebiscite Catalan Parliament Elections. The 2015 independence movement have raised these elections as a plebiscite on the independence of Catalonia. Amongst coalitions presented, Junts pel Sí and Candidatura de Unidad Popular- are in favour of independence 11 September, Demonstration Diada: It was marked by the celebration 2015 of the Via Libre to the Catalan Republic organized by the platform "Ara es l'hora" ("Now is the time" in Catalan) 25 March, 2015 Announcement Convergència Democrática de Catalunya, Esquerra Republicana de Catalunya, Asamblea Nacional Catalana, Omnium Cultural, and the Associació de Municipis per la Independència, agreed to the "unique road of the Catalan sovereignist process" in which a unilateral declaration of independence will be done in the next 18 months if the sovereignist parties won the elections [plebiscite] scheduled for September 27, February, Announcement The Constitutional Court unanimously 2015 conrmed the unconstitutionality of the consultation 9-N 14 January, Announcement Mas announced at a press conference 2015 the advancement of the regional elections on 27 September 2015 and that they would have a plebiscitary character on the independence of Catalonia Pro 27S 9N Diada Against 16

17 13 December, November, November, November, October, September, September, September, 2014 Announcement Announcement Announcement Referendum Announcement Announcement Announcement Demonstration "The Farm Declaration" in which the Popular Party responds to Mas that [the sovereignty and the Spain Unit] are not negociables, therefore it can not change the constitution. Artur Mas presented his plan for Independence of Catalonia in 18 months The prosecution presented a complaint against Mas due to the celebration of the participatory process 9-N The referendum on the political future of Catalula 2014 was held without any incidents Mas recognized that it can not hold the consultation 9-N due to the lack of guarantees Mas signs a decree ocially calling the vote for November 9th. The Spanish Government initiates procedures in order to prevent it by a constitutional Faced with the denial of the referendum by the Congress of Deputies, Parliament of Catalonia passed its own law consultations by 106 votes in favor and 28 against Diada: the tercentenary of the fall of Barcelona and the abolition of the Catalan institutions were commemorated. Although acts throughout Catalonia, the largest participation was organized by Omnium Cultural and ANC in Barcelona with great concentration, named Via Catalana or V, in the two main Avenida- the Gran Via and forming a V of Diagonal- performed 11 kilometers long with the apex at the Plaza de Las Glorias, with the aim of vindicating the "right of self-determination" of the Catalan people 17

18 25 July, 2014 Announcement Jordi Pujol, who is one of the most inuential politicians of the independence movement, especially in the 80s, acknowledged in a statement sent several media have hidden to the Treasury for 34 years "money located abroad," according to their statements from his father Florenci Pujol 8 April, 2014 Announcement The referendum request was rejected by the plenary in an overwhelming majority of Congress Disputed 14 March, 2014 Announcement Negative judgment on the "sovereignty" and the "right to decide" in Catalonia by the Constitutional Court 16 January, December, September, 2013 Announcement Announcement Demonstration The Catalonia's parliament approved a motion requesting that the Congress of Deputies the transfer of the competency for the referendum A majority of Catalan political parties approve a referendum for independence on November 9, 2014 (9-N). Diada: Via Catalana towards Indenpendencia, also known as Via Catalana, was a human chain of about 400 km in Cataliña independistas association promoted by the Catalan National Assembly for September 11, 2013 with the aim of vindicating the independence of Catalonia 26 June, 2013 Announcement Took place in the Parliament of Catalonia the constituent meeting of the National Pact for the Right to Decide in favor of the right to self-determination in Catalonia, formed by forty parties, unions and associations 8 May, 2013 Announcement Precautionary suspension of the Declaration of Sovereignty and the "right to decide" by the Constitutional Court 18

19 13 March, 2013 Announcement The Catalan Parliament resolution of 13 March 2013, contrary to its declaration of sovereignty and in recognition of its statutory subordination skills needed to talk bilaterally with the Spanish Government on the "right to decide on its sovereignty" arrogates according your political intention of negoar one referendum indenpendencia outside both the rest of Autonomy and the rest of the Spanish electoral body 23 January, Announcement The Catalan parliament approves a 2013 declaration of sovereignty that allows the region for self-determination but the Spanish justice decreed unconstitutional in March November, Announcement Early elections: Conservative coalition 2012 CiU Artur Mas wins the elections but with less support than expected so is forced to negotiate with the separatists ERC left. 27 September, Announcement The Catalan Parliament approved on 2012 September 27, 2012 a resolution calling for self-determination celebrate referémdum Catalonia during the tenth legislature of the autonomous Catalonia "priority" with after the elections to Parliament of Catalonia September, Announcement The Spanish Prime Minister Mariano 2012 Rajoy refuses the request of the regional president Artur Mas to improve the tax system Catalulaña. Five days later, Mas announces early elections hoping to strengthen its leadership. 11 September, Demonstration Diada: Demonstration "Catalunya, not 2012 estat d'europe". Hundreds of thousands of people ooded the streets of Barcelona calling for independence from Catalonia. On the same day, 2012 and 2014 are similar 11 September, 2011 Demonstration Diada 19

20 10 July, 2010 Demonstration Hundreds of thousands of Catalans were demonstrating in Barcelona under the slogan "We are a nation. We decide". This demonstration was a response to an appeal by the conservative Popular Party of June 28, 2010, in which the Constitutional Court was Spanish partially cuts the autonomous status of 2006 and left without legal eect the chapter that describes Catalonia as a "nation". 28 June, 2010 Announcement A resource of the conservative Popular Party in which the Spanish Constitutional Court partially cuts the autonomous status of 2006 and left without legal eect the chapter that describes Catalonia as a "nation" Sub-Total Total

21 Table 2: Summary of political events of interest for this research Events Description Number Total Events Pro Total events that favour the separatist process 22 Total Events 27S Total events related to the plebiscite of 5 September 27, 2015, it includes announcements by politicians and the plebiscite day Total Events 9N Total events related to the referendum of November 9, 2014, it includes announcements by politicians and the referendum day 10 Total Street Demonstrations Diadas celebrated every year in September 11. Further, it includes demonstration called "Somos una nación. Nosotros decidimos" celebrated in July 10, 2010 Total Events Against Total events against the separatist process 9 Particular Events In addition to the aggregated political events, we 4 will also analyze some particular events such as Post 27S Day of the agreement between Junts pel sí and CUP 27S Day Day of the 27S plebicite 9N Day Day of the 9N referendum Pujol Scandal Day of

22 Table 3: Contingency Table of number of rms according to registered address and Google search-base measures Headquartered in Catalonia No headquartered in Catalonia Total Google Measure Google search-base measure above the average Google search-base measure below the average Total Headquartered Measure

23 23 Table 4: Results for portfolio of rms above/below the average of the Google search-base measure. Event period [ 20, 1]. Event window[0, 1] Daily stock returns (%) Total Pro (1) Total 27S (2) Total 9N (3) Total Diadas (4) Total Against (5) Catalan Spanish Catalan Spanish Catalan Spanish Catalan Spanish Catalan Spanish Events (0.0011) ( ) ( ) ( ) ** ( ) -6.68E-05 ( ) *** ( ) ** (0.0010) ** (0.0013) ( ) Ln Assets * (0.0021) ** ( ) *** ( ) 0.170*** ( ) ( ) (0.002) ( ) ( ) ( ) ( ) Leverage (0.0021) ( ) (0.0664) 0.241*** (0.0182) *** ( ) ( ) ( ) ( ) ( ) ( ) MSCI-world *** ( ) *** ( ) ( ) 7.25e-05*** ( ) 9.12e-05*** ( ) 8.31e-05*** (1.93E-05) *** (2.15E-05) *** (2.41E-05) 3.33E-05 (4.06E-05) 9.88e-05*** (1.37E-05) Firm xed x x x x x x x x x x eects Period xed x x x x x x x x x x eects Constant *** (0.0475) *** (0.0282) *** (0.111) 2.398*** (0.119) ** (0.0652) ** (0.0534) *** (0.0662) *** (0.044) (0.0573) *** (0.0334) n 16,477 13,989 3,760 3,344 8,607 7,183 5,444 4,631 8,990 7,731 R Cluster Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1