What Value Should We Place on Street Protests?

Political instability is never good for the economy, but neither is stability underpinned by corruption and favoritism. A recent spate of mass protest movements, like those of the Arab Spring, have sought to upend the endemic cronyism of existing political and economic arrangements.

Using the power struggles within Egypt between 2011 and 2013 as a case study, Tarek Hassan of the University of Chicago Booth School of Business, along with coauthors Daron Acemoglu of MIT and Ahmed Tahoun of London Business School, set out to measure protesters’ abilities to limit corruption. Hassan presented their results to a group of Chicago Booth MBA students as part of the Becker Brown Bag series.

Former President Hosni Mubarak was the head of the National Democratic Party (NDP), which represented the interests of the country’s secular elite. Under his rule, companies with strong ties to his party benefitted enormously from political patronage. Since his fall in January 2011, political power within Egypt shifted repeatedly between three distinct rivals: the military, the Islamist Muslim Brotherhood, and the NDP. Hassan’s study compared changes in the stock market valuations of firms connected to the rival groups relative to nonconnected firms as street protests waxed and waned.

These changes give a measure of the market’s perception of how street protests might affect the outcomes for a politically-connected group. If protests reduce the value of firms connected to the group in power, that suggests that investors believe these firms will be less able to extract rents in the future, effectively checking the value of political patronage and corruption.

To build their dataset, Hassan classified companies listed on the Egyptian Stock Exchange as NDP, military, or Islamist-connected. NDP-connected firms were those with at least one NDP-affiliated principal shareholder or board member. Military-connected firms were those partially or fully owned by one of 11 holding companies controlled by the Egyptian military. Islamist-connected firms were those operating under Islamic principles of finance. To measure the intensity of street protests, the authors built an algorithm to scan media reports for the estimated number of protesters in Tahrir Square each day.

The study’s principal finding is that a higher turnout of protesters is associated with lower daily stock returns, relative to nonconnected firms, for firms connected to the group in power that day. On average, protests against the incumbent power reduces the valuation of firms connected to that party by 0.87 percent per day.

On any given day during Mubarak’s rule, if 500,000 protesters took to the streets, NDP firms suffered a 1.6 percent fall in valuation. Mubarak’s fall reduced the market value of firms connected to his party by 13 percent. During military rule, a similar sized protest reduced the values of military-aligned firms by an average of 0.88 percent per day.

Surprisingly, these drops in values occurred whether or not institutional change appeared imminent or even likely. And the falling political fortunes of one group are not reflected in rising political fortunes for its rivals. Protests had no impact on the relative valuations of firms connected to rival groups.

This suggests that investors did not anticipate that the rents enjoyed by politically connected firms would follow power shifts. In other words, protests did appear to reduce the value of political patronage and corruption. Hassan suggested that protests may therefore be an important step in the gradual development of good institutions.

Hassan and his coauthors also sought to test the prominent narrative that social media played an integral role in the protests. To do so, the authors downloaded every tweet made during three months of protest between June and August 2013, counting the number of tweets referring to the protests.

They found that while social media activity had no direct effect on stock market returns, it did serve as  an accurate predictor of the size of protests on a given day, suggesting that social media played a role in organizing protests. However, Hassan pointed out that the impact of social media was still limited to its ability to mobilize people.

Hassan’s speech concluded with several detailed methodological questions from students interested in the difficulties of pulling together robust data from fluid and uncertain environments.

—Jeffrey Lamoureux