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Is Something Really Happening? Separatist Movements in Modern Democracies and the Stock Market: The Case of Catalonia Iván Mauricio Durán* Francesc Trillas February, 2016 Abstract This paper analyzes how the political uncertainty related to the Cata- lan separatist movement from 2010 to 2015 aect the stock returns of a portfolio of rms exposed to such political risks. To do so, we carry out several event studies, which is a methodology quite used in nance and more recently in social sciences to evaluate the eect of some events on rms. We nd that events associated to announcements by politi- cians do not have any eect on stock prices. Instead, events associated to street demonstrations aect negatively stock returns of both Catalan and Spanish rms, the events against the separatist movement had a neg- ative eect on Catalan rms, and there are some ambiguous eects of the 27S plebiscite on Spanish rms. However, all the eects are economically small, and are very below the ndings of other case studies. Key Words: Event Studies, Catalonia, Stock Market JEL: *Department of Applied Economics, Universitat Autònoma de Barcelona Department of Applied Economics, Universitat Autònoma de Barcelona 1 1 Introduction The economic costs associated to both internal and external violent conicts have been well documented by literature (Garnkel and Skaperdas, 2007; Blattman and Miguel, 2010). Not all political conicts, however, end up becoming vio- lent, but many are instead maintained in the realm of non-violent political strains. For instance, several current political tensions related to demands over sovereignty lies on this non-violent category. That is the case of regions such as Scotland, Quebec, Veneto, Taiwan, and Catalonia, where there have been harsh political tensions in the last years that not necessarily turns into violent conicts. While it is evident that human and physical capital destruction as well as political uncertainty associated to violent conicts can have strong neg- ative eects on economic activity, the consequences of peaceful conicts, such as those arising from sovereignist movements, turn out to be less evident, spe- cially when it comes to democracies highly consolidated with strong and reliable institutional frameworks. Economic costs of either violent or non-violent political conicts can be ad- dressed from distinct perspectives, depending on how economic value is dened. A large body of literature has focused on analyzing the eect of surprising violent events on stock prices (Abadie and Gardeazabal, 2003; Chen and Siems, 2004; Zussman and Zussman, 2006; Guidolin and Ferrara, 2005, 2007; Castells and Trillas, 2013; Acemoglu et al., 2014). This approach relies on the assumption of ecient markets according to which share prices should reect all available information, including any economic or social event. Therefore, if conict af- fects the economy, then events related to conicts should be accompanied by changes in stock prices (Gardeazabal, 2012). Although imperfect, rm stock returns are a good measure of economic value, and, furthermore, assuming that political events are exogenous, this approach can be methodologically suitable for identifying the eect of political conicts on economy. By drawing on an event study methodology, this paper is intended to exam- ine the eect of a variety of political events related to the Catalan separatist movement on the stock returns of rms exposed to such political events between 2010 and 2015. If such political events are consider as credible by investors and having a negative impact on the Catalan economy, stocks of rms highly exposed to the Catalan economy should have shown a negative performance relative to rms less exposed to the Catalan economy. As Guidolin and Ferrara(2005) point out, such a task is of importance not only to nancial economists (who typically study the way in which news are compounded into equilibrium prices), but also to social scientists who may be interested in deciphering the economic eects of this kind of non-violent conicts in order to understand the complex relations between politics and economy in the real world today. This paper is related to some recent contributions that have explored the eects of sovereignty conicts on stock returns. In particular, He et al.(2015), examining the case of Taiwan's sovereignty tension, nd that non-violent events harming the relationship between Taiwan and mainland China lead to an av- erage daily drop of 200 basis points in Taiwanese stock returns. The impact is 2 more severe on rms openly supporting the Taiwanese pro-independence party. Another interesting contribution in this eld was by Beaulieu et al.(2006). They investigate the short run eect of the October 30th, 1995 Quebec refer- endum on the common stock returns of Quebec rms. Their results show that the uncertainty surrounding the referendum outcome had an impact on stock returns of Quebec rms, and this eect varied with dierent degrees of political risk exposure. Also, Baker et al.(2015), using a time series methodology, nd evidence that policy uncertainty in the US related specically to presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over scal policy raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction. Nevertheless, analyzing the Catalan separatist movement turns out to be relevant since it can bring new insights on the eect of political tension on economy. First and foremost, the case of Catalonia diers widely from Beaulieu et al.(2006) because we do not center on a unique event (the October 30th, 1995 Quebec referendum), but instead we analyze a broader set of events that, moreover, has not been solved yet. Also, it diers from He et al.(2015) because we do not just take all events as a whole, but we classify them and assess whether they have a dierent eect on stock returns of rms. Secondly, the case study of Catalonia is quite dierent from He et al.(2015) because of some important facts: Chinese economy is enormous in comparison to Taiwan (Taiwan's GDP is about 0.06% of China's), while Catalonia and the rest of Spain have similar economic sizes (Catalonia´s GDP is about 19% of Spain's). Further, although the mainland China-Taiwan conict is developed in a diplomatic arena, the risk of war cannot be discarded (He et al., 2015, p. 3); by contrast, the possibility of a military intervention is much less probable for the case of Catalonia and Spain. In a nutshell, this paper contributes to the literature on economic eects of policy uncertainty related to sovereignty strain by analyzing a current salient case study which is characterized by diverse and frequent political events during a long period, and between two regions of two similar economic size with little risk of violent intervention. And least but not less, in terms of policy debate this paper also contributes to a more case-specic literature on the economic eects of the Catalonia secession, which turns out to be of great relevance given the importance of both the Spanish and Catalan economy in the European context. Providing empirical evidence about the eect of such political events on stock returns can be also a manner of assessing whether the Catalan separatist movement is perceived as credible by investors, and if so, if has a sizable and signicant eect on economy. The results show that the Catalan separatist movement, as a whole, has not had a signicant eect on the stock returns neither of Catalan nor Spanish rms. Although the Spanish and Catalan political agenda has been dominated by this issue in the last years, general results provide some insights about the lack of credibility of the movement by investors. Street demonstrations are the only type of event that has shown having a negative eect on stock returns of 3 Catalan rms. However, this eect does not seem to be economically signicant as it is too small, specially in comparison to ndings by other case studies. Perhaps, this is so for the strength of the institutional framework under which the movement has been developed. That is, the Catalan separatist movement has not been perceived as credible because has happened in a modern democracy that belongs to a strong institutional structure such as the European Union. In this context, investors can believe that Spain has the capability to handle with this conict in a reasonable and inexpensive manner. This papers is structured as follows. Section 2 provides a brief contextualiza- tion of the case study. Section 3 presents a theoretical framework to understand the reaction of stock returns to news and provides the research hypothesis. Sec- tion 4 explains the data. Section 5 puts forward the empirical strategy. Section 6 focuses on explaining the econometric results. And lastly, Section 7 oers a brief nal discussion. 2 Case Contextualization Since Catalonia became part of Spain in the early 18th century, this region has always had a rather strained relationship with the rest of Spain regarding its sovereignty. More recently, in order to force Catalans to leave aside their native language and nationalist symbols, Catalonia undergone repression under Franco dictatorship during the 20th century, which led to an greater demand of more autonomy or even total independence once democracy came again. Parallel to this long-standing tension over sovereignty, Catalonia also became one of the most thriving economies in Spain, exhibiting for a long time economic growth rates above the national average and providing therefore a high living standard for its inhabitants. Since the 2008 Great Recession, however, Catalan economy -as Spanish econ- omy in general- started to show symptoms of severe downturn. In fact, Catalonia was one of the hardest hit regions in Spain.

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