Although interim regimes in former autocracies are generally tasked with initiating a democratic ‘new normal’, they may privately intend to become their country’s new autocratic rulers. We argue that, to cope with the uncertainty stemming from this possibility, investors infer an interim regime’s intentions from the dominance displayed by the regime during government-related violence, as reflected in the share of civilian fatalities. Specifically, we propose that investors interpret higher interim-regime dominance as a signal of weaker democratic intentions and associate such weaker intentions with a gloomier political outlook for local firms. We therefore hypothesize that investors react more negatively to violent events characterized by higher interim-regime dominance. We also hypothesize a less negative effect of such dominance for firms with larger foreign footprints, lower indebtedness, or more concentrated ownership, since investors will likely consider such firms more resilient to political deterioration. Applying event study methodology to 94 spells of violence in Egypt during the Arab Spring, we find substantial support for our hypotheses, thus contributing to management research on investor decision-making, violence, and political uncertainty.
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We would like to thank our editor, Xufei Ma, and three anonymous reviewers for their helpful comments and guidance during the review process. We are also grateful for the constructive feedback provided by participants of the JMS Special Issue Workshop in Lyon. The first author acknowledges the support of the FCT Portuguese Foundation of Science and Technology for project UID/GES/00407/2019.
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