From Neutrality to Alliance: An event study of European defence sector reactions to Sweden and Finland's NATO accession.

Sammanfattning

This thesis examines how the formal milestones of Sweden and Finland's NATO accessionaffected abnormal returns among publicly listed European defence and aerospace firms. Theaccession process, which unfolded as a sequence of thirteen precisely dated steps overtwenty-two months, provides an unusually well-suited setting in which to examine thefinancial-market significance of alliance politics, since each milestone is temporally distinctfrom the war-onset shock and from major fiscal announcements.The empirical design combines a short-horizon event study with cross-sectional OLSregressions using firm-level cumulative abnormal returns as the dependent variable. In doingso, it tests whether the positive defence-sector reaction documented for acute geopoliticalshocks extends to the staged, largely anticipated milestones of an alliance accession.Normalreturns are estimated from a market model over a 90-day window and benchmarked againstthe MSCI Europe Index. Three event windows are examined to capture immediate andanticipatory reactions for a sample of 96 firms across 17 countries from January 2022 toDecember 2024. The cross-sectional regressions examine whether geographic proximity tothe acceding states and country-level defence spending can explain variation inevent-window abnormal returns.The results show negative and statistically significant cumulative average abnormal returnsacross all three event windows, constituting a directional rejection of the prediction thataccession milestones would generate positive returns. Geographic distance is significant onlyin the pre-event window and carries a negative sign, indicating that firms closer to Swedenand Finland experienced relatively higher abnormal returns than more distant firms, eventhough average returns across the sample were negative. Defence expenditure as a share ofGDP exhibits no robust association with abnormal returns, while firm-level profitabilityemerges as statistically significant across all three event windows. Taken together, thefindings suggest that institutional security events are not priced like acute geopolitical shocks.By the time alliance decisions are formally ratified, much of the structural revaluationappears to have already occurred through the preceding sequence of diplomatic signals andshifts in political posture. The abnormal returns visible in short event windows may thereforereflect the partial unwinding of positions established earlier rather than a fresh repricing ofsecurity risk.