It’s been nearly four years since mass protest forced Egyptian dictator Hosni Mubarak’s resignation after nearly three decades in power, followed by military rule, and less than two years since a second wave of protests ended the one-year presidency of the Muslim Brotherhood’s Mohamed Morsi. But new research shows that street protests didn’t just upend Egyptian politics, they had a significant effect on Egyptian stock valuations and, later, corporate board composition.

“Using daily variation in the number of protesters, we document that more intense protests in Tahrir Square are associated with lower stock market valuations for firms connected to the group currently in power,” write Daron Acemoglu, Tarek Hassan, and Ahmed Tahoun in their article The Power of the Street: Evidence from Egypt’s Arab Spring.

Stock Prices

Measuring protests and their impact on stock prices

To figure out whether street protests directly affected stock prices, the researchers looked at daily returns on 177 Egyptian stocks between January 1, 2005 (well before the revolution started) until July 31, 2013 and noted which stocks were connected to Mubarak’s National Democratic Party (NDP) by comparing corporate boards against a list of high profile NDP members provided by the Emsek Felool (roughly, to catch remnants of the old regime) campaign that followed Mubarak’s downfall.

They estimated the size of each day’s protest by taking the median of all reported figures from English-language Egyptian newspapers and found that larger protests caused larger drops in the valuation of NDP-connected stocks relative to unconnected stocks. A 500,000 person protest in Tahrir Square, for instance, caused NDP-connected stocks to drop an additional 0.8%.

Stock Prices

Twitter as a measure for political unity

The role of Twitter in the Arab Spring has been heavily debated, and the researchers don’t wade into that issue directly, but it does give them an interesting way to measure the political opposition’s unity throughout the protests. They measure the number of prominent political leaders re-tweeting Tahrir-related messages, and then calculate the ‘opposition turnover rate’ – the number of people who re-tweeted Tahrir-related messages yesterday but didn’t re-tweet them today.

Even though that’s an indirect way of measuring political unity, it’s good enough to have a statistically significant correlation with the stock market: protests with a high opposition turnover rate had a much lower impact on stock prices.

The most straightforward explanation for this market shifts would be that investors expected politically connected gains to shift from the NDP-connected companies to the opposition, but Acemoglu, Hassan and Tahoun argue that rents re-allocation is only part of the story. If people were simply hedging against a revolution you would expect to see opposition-related companies to have benefited from the NDP-connected companies loss, but that didn’t happen. They argue that the market weren’t just pricing in a shift of cronyism from one party to another, but lower politically connected profits overall.

Stock Prices

Egyptian board recomposition

If it’s encouraging that street protest can punish corrupt companies in the short-term, the long-term message is less promising. Acemoglu, Hassan and Tahoun have also found that the same corporate boards that were connected to the NDP started bringing board members with military connections in the year immediately after the revolution and board members with Islamic affiliations while Morsi was president.

“Egyptian firms appear to have shifted the composition of their boards to include more representatives from the group currently in power during each phase of Egypt’s Arab Spring. For example, during military rule firms tended to hire military officers and fire NDP members,” they write.

Street protests may have temporarily tripped up companies with connections to the former regime, but they wasted no time building new relationships with whoever happened to be in power.

H/T Joe Wiesenthal

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