Political turmoil and banks’ stock returns: Evidence from Turkey’s 2016 coup attempt

Accounting 6 (2020) 1161–1166 Contents lists available at GrowingScience Accounting homepage: www.GrowingScience.com/ac/ac.html Political turmoil and banks’ stock returns: Evidence from Turkey’s 2016 coup attempt Khaled Alsaifia*, Abdullah M. Al-Awadhia and Salah Alhammadib a College of Business Studies, Public Authority for Applied Education and Training (PAAET), Kuwait bCollege of Business Administration, Gulf University of Science and Technology, Kuwait CHRONICLE Article history: Received May 15 2020 Received in revised format May 16 2020 Accepted June 29 2020 Available online July 4 2020 Keywords: Coup Attempt Istanbul Stock Exchange (ISE) Banks Index Event Study Method State of Emergency ABSTRACT Turkey experienced an extreme political event on Friday July 15 2016 in the form of an attempted coup. This paper examines the impact of this event on the components of the Banks Index of the Istanbul Stock Exchange using event study methodology. Results show that the banks’ abnormal returns (ARs) were a statistically significant negative from +2 to +6 days with the peak on day +3 when the government declared a state of emergency. Furthermore, when the banks’ stocks are compared with the overall market, they display lower volatility during the study period. These findings evidence the importance attached to political factors and particularly political instability in shaping investment decision making. © 2020 by the authors; licensee Growing Science, Canada 1. Introduction Political events are known to be a source of stock market volatility due to the uncertainty they bring (e.g. Bash & Alsaifi 2019; Günay, 2019). Turkey is one country that has experienced political turbulence and has been the subject of studies of stock market impacts. These studies have generally used the banking institutions listed in the Istanbul Stock Exchange (ISE) that constitute the Banks Index. While political instability is associated with reduced investment, there is a lack of evidence regarding the specific impact of the Turkish attempted coup of 2016 on the ISE. Therefore, providing evidence to fill this research gap would contribute significantly to the literature. Furthermore, banks are often excluded from stock return studies on the basis they are different in important respects from non-financial stocks, reducing the available literature on this important sector (European Central Bank, 2006). With this motivation, we analyze the listed stocks on the Banks Index of the ISE to examine the effect of the coup on banks’ returns. Focusing on the banking sector is justified by the commanding role they play in providing business investment in the country (Kartal et al., 2018) and their success in attracting foreign direct capital flows which has contributed to the rising value of bank stocks (Acar & Temiz, 2017). On Friday July 15, 2016, a military coup was attempted to overthrow the Turkish government. It started after the stock market had closed and had been quashed within just a few hours (BBC News, 2016a). The government declared a state of emergency on Thursday July 21 2016 (BBC News, 2016b). A military coup is an extreme political event and can be expected to lead to rapid and highly negative investor reaction. Section 2 presents a review of the literature on political crises and stock returns. Section 3 presents the research design, followed by Section 4, which shows the research results and discussion. Section 5 concludes. * Corresponding author. E-mail address: (K. Alsaifi) © 2020 by the authors; licensee Growing Science, Canada doi: 10.5267/j.ac.2020.7.002 1162 2. Literature Review Political risk is a component of financial risk alongside market risk, credit risk and operational risk and is particularly significant in emerging economies (Günay, 2016, 2019). The political domain has long been understood to be an important part of the external environment in which businesses operate (Aguilar, 1967). Most of the time, this domain affects a business when a government interacts with the economy, such as when it regulates or when it determines the balance between public and private sectors. In addition to the ongoing significance of politics, there are periods when the political domain has a more acute effect on businesses. These political events can be extreme in their impact. An example of an extreme political event is an attempted coup such as the one experienced by Turkey on Friday July 15 2016. An unsuccessful coup is an indicator of political instability, alongside others including terrorist attacks, the detention of opposition leaders, riots, protests, and media censorship (Jadallah & Bhatti, 2019). Changes of government as a result of a democratic process effect economic growth positively while undemocratic regime change has a negative effect (Feng, 1997). The literature has examined a broad range of political events for their effects on stock market returns, including both multi-country and single country effects. Amihud and Wohl (2004) found a strong effect on stock prices from the anticipation of Saddam Hussein’s fall from power in 2003, suggesting that it was associated with ending a costly and destabilizing war. Chen and Siems (2004) examined the historical effect of terrorism on stock markets, finding a significant negative effect on returns. The Iraq war was also associated with increased risks and causing a fall in equity prices and U.S. treasury yields (Rigobon & Sack, 2005). The September 11, 2001, terrorist attacks on the U.S. have also been investigated for their effect on risk perception and tail dependence (Straetmans et al., 2008). Using a worldwide dataset of 447 political crises, Berkman et al. (2011) report that the beginning of a crisis is associated with increased stock market volatility and conversely the ending of a crisis sees reduced market volatility. The Brexit referendum, held in the U.K., is another political event that had a significantly negative effect on stock returns in many countries (Arora, 2017). The Brexit effect on stock market returns across a large number of indices was also confirmed by Burdekin et al. (2017). There are also single country studies on political crises and stock market returns. On March 1, 2003, Turkey’s parliament effectively blocked the U.S. from stationing military forces on its soil, a highly significant political event. Aktas and Oncu (2006) found that the investor reaction to this event supported the efficient market hypothesis as the market responded appropriately to new information resulting in neither an overreaction nor an underreaction. The Arab Spring, starting in January 2011, was a period of political instability in the Arab world. It was to have a sustained negative effect on stock returns in some countries. For example, in Egypt, from January 2011 to January 2012, half the value of the benchmark index, the EGX 30, had been wiped out (Lehkonen & Heimonen, 2015). Ayub (2017) examined the effect of Pakis (...truncated)