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

Abstract

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