The impact of unsuccessful pirate attacks on financial markets: Evidence in support of Leeson's reputation-building theory

- The effect of unsuccessful Somali pirate attacks on financial-market returns in the Arabian Peninsula is examined.
- Unsuccessful pirate attacks are associated with lower financial-market returns.
- Findings suggest that market participants expect unsuccessful pirate attacks to be followed by future pirate attacks.
- The results support Peter Leeson's (2010a) reputation-building theory of pirate signaling behavior.

This paper examines the effect of unsuccessful Somali pirate attacks on financial-market returns in the Arabian Peninsula. Specifically, it tests Leeson's (2010a) reputation-building theory of pirate signaling behavior postulating that unsuccessful pirate attacks may trigger subsequent future attacks by pirates as pirates attempt to maintain and build their reputation for effective piracy. We test this theory empirically by studying the relationship between pirate attacks and financial-market returns in the Arabian Peninsula. The result of our empirical test supports Leeson's theory: unsuccessful pirate attacks are associated with lower financial-market returns, suggesting that market participants expect unsuccessful pirate attacks to be followed by future pirate attacks.