Firm reaction to geopolitical crises: Evidence from the Russia‐Ukraine conflict

• Published date: 01 December 2023
• Author: MD ASIF UL ALAM,Erik Devos,Zifeng Feng
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/jfir.12354

Received: 10 October 2023

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Accepted: 23 October 2023

DOI: 10.1111/jfir.12354

ORIGINAL ARTICLE

Firm reaction to geopolitical crises: Evidence

from the Russia‐Ukraine conflict

MD ASIF UL ALAM |Erik Devos |Zifeng Feng

The University of Texas at El Paso

Correspondence

Erik Devos, Woody L. Hunt College of

Business, University of Texas at El Paso,

El Paso, TX 79968.

Email: hdevos@utep.edu

Abstract

This paper investigates corporate announcements related

to the Russia‐Ukraine conflict of S&P 500 firms. We

observe that firms withdrawing from Russia or suspending

operations possess higher cash levels. Additionally, firms

with more cash seem to announce withdrawals or suspen-

sions more promptly. These findings suggest that cash

levels are pivotal in how firms respond to geopolitical

events. While cash does not seem influential when firms

announce donations due to the conflict, it does affect the

speed of such announcements. Social media also appears

to play a significant role. Examining investor reactions to

donation or withdrawal/suspension announcements, we

report negative returns surrounding these announcements.

Our paper underscores the critical role of cash reserves

(i.e., financial flexibility) in shaping firm reactions to

geopolitical events.

JEL CLASSIFICATION

G11, G14, G18, G30

1|INTRODUCTION

With the onset of the war in Ukraine, geopolitical risk has surged to heights reminiscent of the Gulf War. Although

challenging to quantify, the economic consequences are believed to be profound. In May 2022, the Federal Reserve

anticipated a 1.7% reduction in global output due to the conflict. Several papers have tried to estimate the

J Financ Res. 2023;46:163–182. wileyonlinelibrary.com/journal/JFIR

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© 2023 The Southern Finance Association and the Southwestern Finance Association.

We thank two reviewers and participants at the JFR's 2023 European Symposium at Bocconi University for their comments. All errors are ours.

economic effects of the Russia‐Ukraine war through the lens of various stock market indices. For example, Ahmed,

Hasan and Kamal (2022) investigate several European stock market indices surrounding the start of the crisis.

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While these studies are interesting and provide insights into the anticipated economic effects at the beginning of

global crises, important issues are overlooked. How do firms react to these crises? When do they react? What firm

characteristics matter? And how do investors respond to these reactions?

Using the conflict in Ukraine as an experimental setting, this paper delves into the responses of firms and their

investors. Two main advantages underlie our choice of this conflict. First, the number of companies affected is

significant. This is evidenced by the fact that many companies have changed their operations since the start of the

crisis. More than 1000 companies announced that they are voluntarily reducing operations in Russia (to some

degree) over the minimum level required by international sanctions. Yet, some companies have continued to

operate in Russia undeterred. Combined, this provides a sizeable heterogeneous sample of firms with varied

responses. The second benefit is that this crisis marks one of the initial instances where firms had to make decisions

and adopt policies under the bright lights of public opinion, magnified by social media.

This study is important for several reasons. First, our paper completes, to some extent, the existing literature by

not merely focusing on the start of the conflict (i.e., the invasion of Ukraine) but by focusing on how companies deal

with this particular crisis. Second, our paper adds to the growing work on firm crisis management. Most of this

literature focuses on firm‐specific crises. Our paper investigates firm responses to geopolitical crises. This literature

is vast, but no event of this scale has occurred since the Gulf War. Other recent literature focuses on events like the

Arab Spring in 2011 (Lehkonen and Heimonen, 2015) and the blockade of Qatar (Buigut and Kapar, 2020). Third,

foreshadowing our results, our paper adds to the literature emphasizing the importance of cash reserves during

crises. Again, extensive literature investigates cash as it can be used quickly in crises, essentially as a crucial buffer

providing both reserves and flexibility.

Specifically, in our paper, we employ a sample of crisis responses of large U.S. firms. Specifically, we investigate

sample firms' reactions to the Ukraine conflict. After analyzing many news stories and firm filings, we find that of

455 sample firms that survive our data screens, 146 either suspended operations in Russia or withdrew from Russia.

A second substantial set of firms, 102 to be precise, donated to various Ukraine‐related causes. Presumably, the

rest did not alter operations nor donate.

Based on the literature that focuses on the role of cash and financial flexibility in terms of crisis (see, e.g.,

Acharya and Steffen (2020), among many others), we investigate the role cash levels play in framing these decisions

and hypothesize that cash levels may be positively related to these announcements. Consistent with this

hypothesis, we find that suspending or withdrawing is positively associated with the cash levels of these firms

before the crisis. When we investigate the determinants of donating, we find that only size is statistically significant

in our regressions. When we look at the timing of the withdrawal/suspension and donating announcements, we

report that cash‐rich firms tend to announce their plan to withdraw or suspend relatively quickly. This is also the

case for firms that announce donations. In addition, we also find that social media presence seems to play a role in

some of these firm decisions.

Finally, in the last part of our analyses, we investigate the stock market reaction to the responses of these firms.

The stock market reacts negatively to suspension/withdrawal and donation announcements. These announcements

clearly are not seen in a positive light by investors, which is perhaps not surprising as it is hard to find anything

positive related to this conflict for the vast majority of firms, and these announcements may simply heighten

investors’awareness of this fact. Most interestingly, we find that other than performance for the donating firms,

none of the firm characteristics reliably relates to these announcement returns.

Overall, our findings seem to indicate that firm characteristics matter when navigating geopolitical crises. More

precisely, cash matters. Moreover, these reactions matter to investors. The rest of our paper contains the following

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Other examples are Boubaker et al. (2022), Bougias, Episcopos and Leledakis (2022), Yousaf, Patel and Yarovaya (2022), and Wu et al. (2023).

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