Tahrir Square's power over stock prices

In 2011, Egyptians found power in numbers in their Tahrir Square protests — leading to the eventual downfall of the ruling regime, and in the near-term cutting off beneficial relationships between the government and favored companies.

The bigger the protests grew, the more they pushed down stock-market valuations for firms connected to the government, according to research from the University of Chicago Booth School of Business.

The findings, in "The Power of the Street: Evidence from Egypt's Arab Spring," a working paper, suggest that protests may disrupt the "pipeline" of privileges and unearned income that flow to politically favored companies, without redistributing those privileges to firms connected to rivals of the regime in power.

Tarek A. Hassan of Chicago Booth, Daron Acemoglu of the Massachusetts Institute of Technology and Ahmed Tahoun of London Business School tracked the size of protests in Tahrir Square through print, online, and social media, and compared them with daily stock returns on the Egyptian Stock Exchange, and found that Twitter influenced the size of the protests. Examining 311 million tweets from protesters and political leaders in Egypt, they show that when more tweets used "#Tahrir" hashtags, more protesters turned out to Cairo's main square the next day.

Virtual protests alone, though, are not enough to have an effect on stock-market valuations. "You only see things moving when people go and protest in the street," Hassan said.

Larger, more cohesive protests in Tahrir Square likely send a stronger signal to investors, who may anticipate that ruling elites will be inhibited in expropriating wealth from the economy. On the other hand, when protests are weakening, connected companies see their economic privileges increase. "Investors believe that if the regime has support in the street, it can start misbehaving again," Hassan said.

Although the researchers only studied Egypt, they say uprisings in countries such as Ukraine may have a similar effect. By taking away economic clout from politically connected firms, street protests could shift the balance of power in countries that have few checks on government influence.

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Contact: Professor Hassan is available for further comment at Tarek.Hassan@chicagobooth.edu.

From: Ethan Grove, Chicago Booth Office of Media Relations, 773.834.5161 (office), 773.420.8670 (cell), Ethan.Grove@chicagobooth.edu.