Corporate responses to political turmoil: Cutting business ties to Russia

Abstract

In this master’s thesis, we investigate the drivers behind companies’ decision to pull out from Russia after the outbreak of the Russian invasion of Ukraine. We also study the market reaction to these exit announcements and potential peer influence affecting the pull-out decision. This study extends the previous, scarce research into the Russia-Ukraine war, exploring mainly stock market reaction and the economic and operational spillover effects of the war.

The study uses a sample of 596 companies that have either announced their intention to cut off business ties to Russia and stop operations there or who still operate as usual in Russia. Of 596 sample companies, 440 (74%) have announced their intention to exit from Russia after the start of the war in February 2022, and 156 (26%) have not commented on their intentions or have stated their intention to continue operating in Russia. We assess the likelihood of making the exit decision through a logistical regression model and further investigate the timing of the decisions and the market reaction to companies announcing their exit intention through a multiple linear regression model. In addition, we investigate the characteristics of companies who have announced their exit among the first ones versus later to identify patterns suggesting that stronger peers’ exit decisions would have influenced the decision of their weaker peers.

We find that companies with high exposure to Russia have been less likely to make an exit decision, reflecting the difficulty of cutting ties to Russia. We find limited evidence on whether a company’s social responsibility is associated with an exit decision: the company’s social pillar score does not explain the exit decision, but companies who provided humanitarian aid to Ukraine were more likely to announce their decision to pull out from Russia. We also show that larger firms have announced their exit decisions sooner, as have firms with high capital intensity. Regarding the announcement date effect, we find that companies announcing their exit later rather than sooner, as well as companies with higher social scores, experience less negative announcement returns. In addition, we find that companies that had stronger share price development between the outbreak of the war and the exit announcement day experience less negative abnormal returns, implying that the market evaluated companies’ abilities to navigate their operations amidst the crisis and the potential to execute a successful exit from Russia. Finally, we do not find credible evidence that stronger peers would have announced their exit decision first, suggesting a low likelihood of a leader-follower phenomenon.