Impact of Indo-Pakistani Conflicts on the Stock Performance of Indian Defence Companies

Purpose – This study aims to study the effect of the events of Indo-Pakistani conflicts on the stock performance of Indian Defence companies. Design/methodology/approach – The research is based on the event study methodology of analyzing the reactions of stock market to selected conflict-related events under the assumption of semi-strong form of market efficiency. Abnormal returns (ARs) and cumulative abnormal returns (CARs) are estimated by using the market model over a certain estimation window and multiple event windows around the event dates. Data – The analysis is based on the daily adjusted closing prices of listed companies in the Indian defence sector, primarily using the NIFTY Defence Index and a broad market index as benchmarks. Findings – Results of empirical study show the presence of statistically significant abnormal returns and cumulative abnormal returns around the conflict events, which show that Indian Defence stocks react positively to information in respect of Indo-Pakistani military escalations. The response of the market is mostly short-term, indicating that geopolitical information is incorporated into stock prices rather quickly. Originality/value – To the best of the author’s knowledge, this study presents the first firm level empirical evidence on the impact of Indo-Pakistani conflicts on the Indian defence sector using event study methodology in order to add to the emerging literature on geopolitical risk and sector specific stock market reactions in an emerging economy context.