Hypotheses Testing and Historical Analysis


Oil Nationalisation and Managerial Disclosure: The Case of Anglo-Iranian Oil Company, 1933-1951

Chapter 5: The AIOC’s Stock Market reaction to nationalisation: Event Analysis and empirical results


This section proposes three related and alternative hypotheses to be examined
using a data set of historical quantitative variables. The first hypothesis involves investigating the economic impact of nationalisation on AIOC investors by comparing the loss in market value with the book value of the assets nationalised as disclosed in the 1950 AIOC Annual report and Accounts. Thus, the null and alternative hypotheses are:
H0: Nationalisation event has no economic impact on the AIOC investors
H1: Nationalisation event has an economic impact on the AIOC investors (1)

The second hypothesis involves testing the impact of announcement of
nationalisation in 30th April 1951 on AIOC investors

H0: Announcement of nationalisation has no information impact on AIOC investors
H1: Announcement of nationalisation has an information impact on AIOC investors (2)

The third, and related, hypothesis involves testing the impact of the publication of the AIOC annual report in November 1951 on AIOC investors.

H0: There was no information content of annual report disclosure during the publication of AIOC report
H1: There was information content of annual report disclosure during the publication of AIOC report (3)

Finally, a subsequent and essential hypothesis arising from the previous
hypotheses, involves testing whether the Market is weak and semi strongly efficient during both events or not.

H0: Market was inefficient at weak-form and semi strong level
H1: Market was efficient at weak-form and semi strong level (4)

These hypotheses follow from the clear features of the capital market that were
discussed in the previous section. To test the information content hypotheses, I will employ the event study as a tool to investigate the impact of nationalisation on AIOC investors by measuring their abnormal returns and to test whether they can anticipate bad news. Abnormal returns are calculated with reference to day t0. Daily returns are used to compute abnormal returns. Abnormal returns are measured in circumstances where the availability of data is restricted by using the market adjusted return model rather than the market model[701]. Consequently, this study aims to measure the shortterm wealth effects for AIOC shareholders using the Market Adjusted Model, examine the response of the stock market to the information content disclosed by Fraser in the published AIOC annual report in 16th November 1951. And finally test for weak form efficiency and semi strong efficiency.

The AIOC share price was compared with the first major UK stock market index, the Financial Times Industrial Ordinary Shares Index (FT30), over the period 1950 to 1951. Comparing the AIOC‟s Return Index (RI) with the FT30 will provide a clear picture of the performance of the AIOC in relation to the market which is very useful for assessing the AIOC‟s security prices reaction to nationalisation event. In the interim, this study examines the efficiency of the UK stock exchange at the weak level and semi-strong level for the AIOC stock listed in the market by using daily observations of the FT30 index. Parametric testing will be used to test for serial dependence in the AIOC returns. The event study involves various procedural steps. It starts by defining the event and specifying the event date, then estimating the expected returns and observing the realised ones within the event window. It then involves measuring the abnormal return (AR) which refers to the shareholder return over and above the average return on the market. Finally, it aggregates the abnormal returns over the event window (CAR). In order to define the event window, a historical analysis including a timeline of events has to be defined – here the background to the nationalisation crisis.


Historical Analysis 

Iran‟s investment and growth rate flourished in the second half of the 1940s but the recovery was short-lived due to the high level of political instability during those years, reflected in frequent demonstrations and strikes as well as the assassination attempt on the Shah[702]. In October 1947, the Iranian government committed to renegotiate the concession, demanded a fair compensation for the British „expropriation‟ of the oil resources and was keen to increase the amount of royalties paid to them. The Iranian government‟s control was largely confined to revenue taxation and minimal maintenance of order due to the influence of internal and external forces resulting from British imperialism. As previously indicated in Chapter 4, Iranian grievances were well explored and justified in Gidel‟s Memorandum: Iranians were dissatisfied because they did not have control over the allocation of net profits between dividends and reserves[703].

The development of the Iranian economy was affected by international price movements, international market trends and by the ebbs and flows of events occurring in Iran during the 50‟s. The worldwide demand for oil increased throughout most of the 1946 to 1951 period which resulted in profit increases for the major oil companies[704]. However, Iran suffered periods of economic decline when non-economic concerns became overwhelming, during the political turmoil of the first decades of the 20th century or at times of domestic and international conflict (e.g. 1940-1945, 1950-1953) [705]. In the early 1950s, political conditions had changed considerably and new nationalisms started to emerge because the Iranian government wanted to develop policies with which the country could earn higher returns from its oil production. On 7 March 1951, Prime Minister Razmara was assassinated after his broadcast to the nation, which seemed to be urging the Iranians to support the AIOC and continue to produce handicrafts rather than trying to run an oil industry[706]. By this time, nationalism and democracy had become constant features of the Iranian political landscape. The Nationalisation Bill was ratified and had important implications for the performance of the AIOC in that it aimed to secure for the Iranian government rights to nationalise its resources and excluded foreign companies from exploitation[707]. Consequently, on 9 March 1951, the parliament of Iran approved the nationalisation of the British-owned AIOC – one of the largest companies quoted on the Stock Exchange. Nationalisation resulted in a decline in AIOC‟s share price by 3/8 to 5 3/8, which was the lowest price for its stock since 1946 [708]. Nationalisation was a special economic event and, as could be expected, AIOC stock prices were influenced[709]. In a similar vein, nationalisation was a living illustration of the structural problems facing the British government and the AIOC. While Iran‟s oil exports declined in the 1950s and the AIOC‟s assets in Iran were nationalised, the British government was anxious to negotiate a solution with Musaddiq in a reasonable atmosphere[710]. The Times reported that nationalisation was “accomplished by one of the most rapidly completed measures ever passed by the often dilatory Persian Parliament”[711]. However, in a more positive vein, the Times declared that “it is natural and right that the Persian people should now take a greater share in the operation of their main industry”[712]. The movement to nationalise the oil industry was a major issue and the country
came to face an economic embargo from outside and political instability from inside. Oil revenues dropped and brought investment to an end. There were attempts to increase non-oil exports and to keep the level of imports at a minimal level. Regardless of this plan, the non-oil exports became costly to maintain and imports outpaced exports. This kind of ambition naturally generated conflict with the British government which had its own agenda. The way the conflict evolved and the kind of actions the Iranian government took were, however, determined by the type of regime each of the nations lived under. These events lead us, therefore, towards an examination of the impact of the nationalisation crisis on the value of shareholders‟ investments and an investigation of how successful they were in managing their expectations during such a crisis. Table (12) below summarises the major events dealing with the negotiations between the Iranian government and the AIOC for the revision of the existing concession and the introduction of the Supplemental Agreement to be ratified by the Iranian Majlis. The timeline below started in May 1950 and ended in May 1951, providing a complete picture of the major events that took place before the company was nationalised. This time frame was chosen because there tended to be a crucial build-up towards nationalisation since negotiations were intensified by the National Front party during May 1950, which finally resulted in the nationalisation of the company‟s major assets, including the world‟s largest refinery in Abadan, by Musaddiq on the 1st of May 1951.

As clearly shown in Table (12), due to increased National Front representation on the Majlis Oil Committee (MOC) in May 1950, the AIOC offered the Supplemental Agreement to increase the Iranian share in profits in September 1950, but this was not an agreement for an equal division of profits. Consequently, the Oil Commission produced an adverse report in December 1950 explaining that the Supplemental Agreement did not safeguard Persian rights and interests and the Persian Government withdrew the Bill on 26th December, 1950. During February of the following year, the AIOC proposed to negotiate a new agreement based on equal profit sharing but Musaddiq formally proposed to nationalize the oil industry in Iran to safeguard Iranian rights and interests. Eventually, on 7th March 1951, the Iranian Prime Minister, Razmara, was assassinated and this induced the Oil Commission to pass a resolution concerning nationalisation. Finally, after Musaddiq became the Iranian Prime Minister on 29th April 1951, nationalisation was approved by both the Majlis and Senate on 30th April 1951. In addition to the timeline of events explained above, the AIOC share price reaction in relation to the stock market is explained by the following graphs. First, Figure (2) below presents the AIOC share prices along with the FT30 index for May 1950 and May 1951 to illustrate the company‟s performance in relation to the market during nationalisation.

Figure (2) illustrates that there was a steep decline in the trading range of the
AIOC share prices during May-July 1950 which is most likely to be attributed to the influential role of the National Front in Iran. The National Front was willing to safeguard Iranian rights and thus was in favour of nationalisation. AIOC stock prices started to recover between August 1950 and November 1950, reflecting the company‟s willingness to negotiate an agreement and increase the share of profits to the Iranian government. Finally and most importantly, it can be clearly seen that AIOC stock prices gradually fell and reached their minimal value on May 1951. It was at this point that the Majlis first demanded nationalisation and created the MOC, headed by Musaddiq, and the company lost 80.15% of its operational assets[713]. Mid 1951 showed a version of oil nationalism influenced by the events in Iran and consequently this had a negative impact on AIOC stock prices. On the other hand, Figure (2) shows that there was a gradual increase in the FT30
index value from May to July 1950, where it rose slightly from 107 to 115, offsetting the decline in AIOC stock prices that was encountered during this period. Later on in December 1950, the index declined, thus reflecting the collapse of the Supplemental Agreement and revealing the negative impact of the Majlis Oil Commission on the performance of AIOC. Although the events of 1951 were more dramatic, with the assassination of Razmara and the formalisation of the nationalisation legislation, the FT30 index shows an increase in its value, reaching its peak at 130.9 on 1st May 1951. For further illustration, Figure (3) below demonstrates the abnormal returns
calculated for the period May 1950 to May 1951.

Figure (3) shows that the abnormal returns fluctuated between May 1950 and May 1951, reflecting the difference between the expected rates of return of AIOC stock and the actual market rates of return computed from the FT30 Index. By December 1950, the abnormal returns declined significantly by almost -0.08 because the AIOC shares had lost their value, reflecting the collapse of the Supplemental Agreement. Also, it can be clearly seen that the abnormal returns steeply increased in February 1951 reflecting the rise in AIOC stock prices, perhaps due to the negotiations between the company representatives and the Iranian Prime Minister, Razmara. In the period immediately prior to nationalisation, March-May 1951, the abnormal returns decreased, reflecting the significant decline in AIOC stock returns. It was at this point that the Majlis approved the “Single Article Bill” by the Iranian Senate and consequently nationalisation was headed by Musaddiq on 1st May 1951. Furthermore, Figure (4) below presents the cumulative abnormal returns
calculated for the period May 1950 to May 1951.

Figure (4) shows that the cumulative abnormal returns were negative throughout 1951, with a marked decrease in the values in March 1951 and in May 1951. This may explain that nationalisation had a negative impact on the investors of the AIOC. However, it is worth noting that, notwithstanding the assassination of Razmara in March 1951, the appointment of Musaddiq as Prime Minister in May 1951 and the worsening of the AIOC‟s trading position following the huge amount of profit for 1950, the reaction was far less than might have been expected.

702. Esfahani and Pesaran, Iranian Economy in the Twentieth Century: A global perspective, 6-7.

703. Elm, Oil, Power, and Principle: Iran’s oil nationalisation and its aftermath, 37.

704. Unerman, An investigation into the development of accounting for social, environmental and ethical accountability: a century of corporate social disclosures at Shell, 169.

705. Esfahani and Pesaran, Iranian Economy in the Twentieth Century: A global perspective, 2.

706. Elm, Oil, Power, and Principle : Iran’s oil nationalisation and its aftermath, 80.

707. Ibid, 48.

708. Littlewood, The Stock Market: 50 years of capitalism at work, 44.

709. Investors tend to recall stock market events and their outside political and economic influences by reference to the course of a bull or bear market.

710. The Times, May 2nd, 1951, 6(A), Issue 51990.

711. The Times, April 30, 1951, 4(C), Issue 51988.

712. The Times, May 2nd, 1951.

713. Geographical distribution of AIOC activity is calculated from 1950 annual report as illustrated previously in chapter 5; the Iranian activity 80.15% and non -Iranian activity 19.85%.


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