ABSTRACT
On October 2nd, 2018, Jamal Khashoggi, a journalist and critic of the Saudi Arabian regime, disappeared after a visit to the Saudi Arabian consulate in Turkey nd was most likely murdered shortly afterwards. After this incident, a period of uncertainty started about whether or not a major arms deal that was signed between the United States and Saudi Arabia would still going to be approved by Congress or in turn will be rejected. The main findings presented in this study clearly demonstrate that the uncertainty surrounding the deal caused a significant drop in the daily return on the equity prices of US defense firms. This result suggests that investors believe that it is very likely that the major arms deal will be blocked by Congress in the short-run thereby reducing the business perspectives of the US defense-related industry. Besides these findings also imply that investors expect that the US president will not use its veto power or make permanently use of the exemption clause provided in the US arms trade legislation.
Disclosure Statement
No potential conflict of interest was reported by the author.
Notes
2. On the side of Saudi Arabia, Bash and Alsaifi (Citation2019) find that this event had a strong negative effect on Saudi stock returns that is principally driven by local investors.
3. This act is designed to penalize governments for human rights abuses. This gives the administration four months to carry out an investigation and determine whether abuses occurred.
4. The complete holdings list for each ETF can be found at finance.yahoo.com.
5. The results obtained in this estimation are robust to alternative assumptions regarding the distributions of the error term the student’s t.
6. The selection of the control variables is based on the general-to-specific (G-T-S) method. This method does not rely on economic theory, but is a widely used method in applied econometrics to decide on model specification (see Hendry Citation1993). We first estimate a model including all control variables as outlined in the previous section, but without including our embargo indicator. Next, we drop the least significant variable and estimate the model again. We repeat this procedure until only variables that are significant at the ten percent level remain.
7. The correlation between the Yemen conflict-intensity indicator and our deal uncertainty indicator is about 0.24.