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Measuring economic diplomacy using event study method: the case of EU-China summit talks and Airbus stock price changes

Measuring economic diplomacy using event study method: the case of EU-China summit talks and... Economic diplomacy receives growing interest in the field of international relations research ever since the end of the cold war. Despite the vast number of literature on economic diplomacy, there are not many studies measuring the effect of economic diplomacy quantitatively. The purpose of this paper is to propose a method to meas- ure economic diplomacy using the event study method that observes the influence of specific events on stock prices. In this study, the summit talks between the EU and China are selected as specific events that are considered as a form of economic diplomacy, and Airbus stock price, the proxy of the reaction to the economic diplo- macy, was observed to verify the influence of it. The study categorized the summit talks by the type of participants whether the top politicians were included or not. The result shows that, among all summit talks, the summit talks between top politi- cians between the EU and China influence the stock price of Airbus positively, and it is statistically significant. Introduction Increasing numbers of political science papers discuss the growing involvement of modern diplomacy in economic and business relations with other countries. Lee and Hocking (2010) point out that these changes are remarkable compared to the pre- vious role of diplomacy that focused more on security and state power relations. So-called economic diplomacy has become the most crucial part of modern diplo- macy. Top politicians are aware that they cannot only focus on domestic economic issues but should deal with this dimension of foreign affairs. Eventually, those foreign affairs are related to the economic development of the country (Melissen 2003). Even though the term economic diplomacy is widely used, the definition and * Sunkung Choi s.choi@rug.nl Faculty of Economics and Business, University of Groningen, Groningen, the Netherlands Vol.:(0123456789) 1 3 S. Choi concept of it are often vague, and the concerned area is wide-ranging from econom- ics to politics. Economic diplomacy can be understood as the activity through which diplomats and politicians, together with business people, promote and facilitate eco- nomic opportunities between their countries or groups of countries. If necessary, they institutionalize regulations for further investments or trade. For this reason, economic diplomacy is of major interest for all countries these days. The European Union (EU) has, for a long time, been practicing its economic diplomacy as a tool for increasing its influence on world politics. Since the EU does not have a strong motivation for gaining hard power (Michalski 2005), the economic diplomacy of the EU is considered more as a soft power and a diplomatic strategy to enhance its political and economic relationship with its partner countries (Smith 2016, Stoddard 2017, Vasilovschi 2017, Lee and Hocking 2010). Especially when it comes to the foreign economic policy of the EU toward China, considering the unique Chinese market model in which the Communist Party plays an important role, a great effort of politicians and diplomats is required to promote sound eco- nomic relation between the two sides (Liu et al. 2018). China joined the World Trade Organization (WTO) in December 2001. Since then, China has rapidly integrated itself into the global economy in trade and investment relations including the EU. In 2003, the EU and China established the Comprehensive Strategic Partnership, which aims to strengthen the bond between the two areas. After a “honeymoon” period and subsequent adjustment, the two seem to have reached a stable relation- ship in political and economic matters (Li et al. 2017). When it comes to practicing economic diplomacy, there are many types. Among others, summit talks are among the most common ways of practicing it, especially bilateral. The thematic focus of summit talks has broadened progressively in modern diplomacy. Nowadays, it is no longer limited to major political topics but includes more and more economic issues (Melissen 2003). Unlike multilateral summit talks, which may cover a wide range of non-territorial issues such as environment, finan- cial aid, international crime, and migration, bilateral summit talks often target the economic dimension of the relationship (Melissen 2003). Summit diplomacy can be done in several different ways, such as exchanges of letters, telephone calls, and physical meetings. Regarding physical meetings, for example, a state visit, such events are often accompanied by economic delegations. This signals to the public that there is political support for the business and economic relations of the two regions. The purpose of this paper is to explore the economic effect of EU-China eco- nomic diplomacy. Among many methods to study this, the present research explores the effect of summit talks between the EU and China in the stock market. Depending on their perceptions among the public, or at least the audience of financial market players, summit talks can be expected to have positive, neutral, or negative effects on stock market returns. In addition to many conventional political science articles that have studied the influence of economic diplomacy using a qualitative approach (Smith 2014, Okano-Heijmans 2016, Okano-Heijmans and Montesano 2016a, Okano-Heijmans and Montesano 2016b), this paper hopes to contribute to this field of literature by offering a piece of quantifiable evidence with a case study on market returns on Airbus stocks prices by adopting the method of Choi (2020) and 1 3 Measuring economic diplomacy using event study method: the… developing it. In particular, the current study applies more detailed data segmen- tation than Choi (2020). This gives a chance to observe the economic diplomacy before and after President Xi is on his chair. Also, shorter windows are applied to avoid other events’ influence on the stock market. The structure of this paper is as follows. The following section will discuss the summit talks between the EU and China and their connection to the aviation indus- try to explain to what extent both are related and why they can be a suitable study object for research on economic diplomacy. The third section will introduce and pre- sent the data sets, namely, the series of summit talks between the EU and China. Also, this section will explain the event study as a research method. After discussing the result of the study, the discussion and conclusion will be presented in the last section of this paper. The EU‑China summit talks and the aviation industry Melissen (2003) mentions that in international affairs, summit talks started to deal with more economic topics step by step as the world has been becoming more inter- dependent and globalized. A series of economic crises and globalization have cre- ated a situation in which high politicians cannot neglect international economics and economic institutions. In most cases, even political issues during summit talks are eventually related to international business, trade, and investments. For instance, the multilateral summit talks that led to the Paris Agreement of 2015 discussed how to reduce the emission of greenhouse gases, and yet, economists and business people almost immediately engaged in calculations on the implications of it for the national and global economy, and in terms of business opportunities and risks. Indeed, with or without intention, most of the summit talks are eventually related to economics. In 2014, Chinese President Xi visited EU countries with a delegation including 200 business people. He visited the Netherlands, France, Germany, and Belgium as well as the headquarters of the EU in Brussels with the delegation during this trip. The delegation included representatives of major Chinese companies such as the Bank of China, BAIC motors (Beijing motors), SAIC motors (Shanghai motors), and CASHC (China Aviation Supply Holding Company). Throughout the visits, the del- egation signed a series of contracts and Memorandums of Understanding (MOUs) with the companies and research institutes of the counterpart countries. Particularly in France, CASHC agreed to purchase 70 passenger airplanes from Airbus. In the Netherlands, China’s biggest food company, COFCO acquired 51% of the stock of a Dutch grain trader, Nidera Seeds. Also, the delegation made an MOU with Wage- ningen University for corporative research in the food industry and with Dutch car- rier KLM for passenger airplane lease and loan. In the following year, President Xi visited the UK, and 150 business people accompanied his travel. The scale of the delegation increased to 500 business people when President Xi visited Italy in 2019. Following the successful summit talks, the Chinese companies signed several con- tracts with Italian companies to collaborate in various fields such as energy, finance, steel, and construction, with a total volume of more than 2.5 billion euros. Italy stated that it was ready for further economic cooperation with China in the context 1 3 S. Choi of the Belt and Road Initiative. Those few examples indicate that the summit talks of modern diplomacy, especially in the relations between China and the EU, are closely connected to economics and business cooperation. As a methodology, this study applies an event study method. An event study observes whether there are significant abnormal returns in stock price when a spe- cific “event” takes place. In this study, the event will be summit talks between the EU and China. By observing stock price changes of the day of the event or the fol- lowing days and analyzing whether there are abnormal returns after the events or not, it is possible to measure the economic impact of summit talks, as stock markets would reflect the summit talk event into the stock price if it is considered to be rel- evant. Particularly, this study observes Airbus stock prices in the stock market. Many industries are closely related to politics and political events such as con- struction and banking. Among many state-related industry sectors, this study par- ticularly focuses on the aviation industry with a focus on the Airbus stock in France. The passenger airplane market is an ideal case to observe the influence of economic diplomacy for many reasons. First of all, the passenger airplane market is relatively simple to investigate due to its characteristic structure, with only two major sellers in the international market, Airbus and Boeing. Also, it is known that the Chinese airline industry is highly regulated by the government. Due to the high price of air- planes, purchase decisions are known to be political rather than purely commercial (Choi 2020; Heicks 2010). Like purchasers, sellers also operate in a context that is politically shaped. Lynn (1995) discussed the dynamics of politics in this market and relates them to the fact that airplane orders from customers are both crucial and severely contested, thus motivating top leaders to get involved in the promotion of the companies. He mentioned in his book that the former President of France, Fran- çois Mitterrand, and the former President of the USA, Bill Clinton, were the best salesmen for Airbus and Boeing. A more recent study (Galy and Germain 2007) also mentions that competition between the two companies is not only taking place in the market but also in international politics, or in other words economic diplomacy matters. Soft loans and direct subsidies from the governments are another evidence that both companies’ business is not merely driven by market mechanisms but also depends on the support of the governments (Choi 2020). If we turn to China and its aviation industry, China became one of the biggest buyers of passenger airplanes in the world. As China is one of the fastest-growing economies in the world and covers a huge domestic territory, the demand of pas- senger airplane has only been growing. For example, between 1980 and 2007, the average growth rate of the air traffic in China was 18% per year that almost doubles the country’s GDP growth and is three times the world’s average air traffic growth rate during the same period (Choi 2020; Haoting 2008; Leong and Chen 2008). Therefore, it is obvious that the two biggest passenger airplane makers in the world, Airbus and Boeing compete with each other to increase their sales in the fastest- growing market in the world. Statistical data show that in the last 20  years, both companies have been increasing their sales in China (Choi 2020). Airbus has entered the passenger airplane market as a latecomer in 1970, and since then, the company has constantly increased its market share against Boeing (Galy and Germain 2007). Due to the character of the aviation industry, especially 1 3 Measuring economic diplomacy using event study method: the… the high entry barrier related to the fact that it requires tremendous capital invest- ment and high technology, a consortium of European countries has supported the business ever since the establishment of the company. By locating Airbus’ first assembly line outside of the EU in China in 2008 and producing A320 on site, Airbus has been trying to expand its capacity and influence in China. Airbus has achieved coverage of 50% of the passenger airplane market in China in 2020. Indeed, the business and sales of Airbus are highly relevant to the EU-China eco- nomics and also, predictably, political relations (Choi 2020). After a few of the summit talks between leaders from the EU or its member states and their Chinese counterparts, announcements have been released that China would purchase passenger airplanes from Airbus. For example, after the talks between the German chancellor, Angela Merkel, and Chinese President, Xi Jinping, in July 2017, the China Daily announced that China would order 140 Airbus planes for 22 bil- lion dollars  (CGTN 2017). Reuters announced that China would order 184 A320 airplanes from Airbus after the summit talks between the French President, Emma- nuel Macron, and Xi Jinping on 10 January 2018 (Rose 2018). Therefore, economic diplomacy between the EU and China can have a direct impact on the purchasing decisions of Airbus customers in China, and, relatedly, the company value of Air- bus. This further demonstrates the relevance of the aviation industry and Airbus stock price changes as an object of study to observe the influence of economic diplo- macy between the EU and China. This paper, therefore, asks to what extent the eco- nomic diplomacy of the EU and China, with a focus on summit talks, influences the stock price of Airbus. Data and method The event study relies on the “rational market theory” for the analytical logic. The rational market theory assumes that all participants in the market utilize all relevant information in short time or simultaneously. Therefore, the theory expects that new information would be directly reflected in the stock price if the news were relevant to the business of that company (Campbell et  al. 2010). Hence, when we extend this assumption to the topic of the current study, it is possible to assume that if the economic diplomacy of the EU and China, namely, the summit talks between them, has any relevance for listed companies, stock market participants would exploit this information, and this would lead to changes in stock prices. This is how this research employs the method for measuring the economic diplomacy. When the market return is statistically abnormal (out of the normal range), either negative or positive, it is possible to assume that the political event influences the stock market. There- fore, this method allows us to see the immediate reaction of the market toward the summit talks. In this study, particularly, Airbus stock is of interest. https:// www. airbus. com/ compa ny/ world wide- prese nce/ china. html (last visited: April 25, 2021). https:// www. reute rs. com/ news/ pictu re/ airbus- china- contr act- for- 184- a320- jets- idUSK BN1EZ 0BZ (last visited: April 25, 2021). 1 3 S. Choi Originally, the event study method was developed to verify the influence of busi- ness events on the stock price. Therefore, the main topics of such event studies are related to business issues such as merger and acquisition news (Rani et  al. 2015), companies’ performance announcements and dividend announcements (Suwanna 2012; Anwar et al. 2015), news of bankruptcy (Lang and Stulz 1992; Jayanti 2011), announcements of a new product development (Lee and Chen 2009; Pauwels et al. 2003), and the introduction of new regulations in the market from the government side as it influences the performance of related companies (Lamdin 1999). The method has been extended in other fields as well, and researchers started to analyze the influence of non-business or non-economic events such as disasters. Some have explored the effect of earthquakes on the stock market returns (Ferreira and Karali 2015; Takao et al. 2013), whereas others have studied the influence of unusual acci- dents such as gas explosions on the stock market return (Scholtens and Boersen 2011). Similar to the purpose of this paper, there are also many papers which are analyz- ing the influence of political events on economics. For example, there are various studies that explore the stock market reaction to the BREXIT referendum that deter- mined that the UK would leave the EU (Ramiah et al. 2017; Breinlich et al. 2018). Besides, Liu et al. (2018) explore the impact of political connections on firm values in China by an event study. Kim and Roland (2014) and Huh and Pyun (2018) tested whether the political tension between South and North Korea and North Korea’s missile launches influence the South Korean stock market returns using the event study method. The US elections are another widely applied political topic for event study research (Leblang and Bumba 2005, Obradovic and Tomic 2017). Brans and Scholtens (2020) have explored if the Twitter messages of US President Trump influence the US stock market. They use tweets by President Trump that include company names as events. When it comes to summit talk, it is not easy to find papers that apply event study methodology. One recent paper (Pham et al. 2019) has explored the effect of the North Korea-US summit on the South Korean stock mar - ket. The study shows that the news of summit talks between North Korea and US influenced the South Korean stock market negatively. There are already some papers which applied event study in the aviation industry. Galy and Germain (2007) have checked the influence of news about orders on the price of Airbus and Boeing stocks by an event study method. The findings of the study show that order news in general increases the stock price of the corresponding company and decreases the stock price of the counterpart. Adopting the literature that investigates the direct connection between order news and company value (Galy and Germain 2007), and summit talks and the stock markets (Pham et al. 2019), this study asks whether the political event “summit talk” influences by itself a specific company’s stock price returns. One could argue that the mechanism of the stock price changes is not clear whether it is the effect of the “order announcement” which is followed by the sum- mit talk or it is the summit talk event itself. This study assumes the latter case is how economic diplomacy influences the stock price of Airbus. As the first case has been already studied by Galy and Germain (2007), it is possible to assume that the order news influences to the stock price for sure. This study, however, wants to see 1 3 Measuring economic diplomacy using event study method: the… Table 1 Composition of the Summit talks types by participants Observation (N) sample (1028 events) Level 1 meeting (high-level summit talks) 271   One top politician 189   Both side top politicians 82     Xi Jinping summits 36       with France 10       with Germany 9 Level 2 meeting (working dialogues) 757 As Table  1 illustrates, level 1 meetings are divided according to the participating figures. This sub-division is necessary to identify the dynamics of economic diplomacy between the EU and China. For example, through this division, one can observe the economic diplo- macy of President Xi separately from other events whether the political event which is considered to be as an economic diplomacy practice also influences the stock price of relevant industry and, eventually, one can measure it. Also, one should notice that not every summit talk announces the order of airplanes. If we still capture the economic diplomacy in a quantifiable manner, we can apply the suggested method of this paper for other country and industry for measuring the effect of economic diplomacy. As the name of the method implies, it is very important to identify the event itself to observe its effect on the stock price. This study collected all summit talks between the EU and China that have occurred between January 2002 and August 2018 to form an event set. The reason for collecting the data from January 2002 is that China joined the WTO in December 2001 and China and the EU established a Comprehen- sive Strategic Partnership in the following year. The events were collected from the Chinese Ministry of Foreign Affairs website where all bilateral meetings are listed. In total, 2033 summit talk events have been identified between January 2002 and August 2018. The 2033 summit talks include all types and levels of talks from high- level summits to regular practical conversation meetings that are published on the webpage of the Ministry of Foreign Affairs. From among these events set, high-level summit talks were selected for the analysis. They amount to 1028 events. The high- level summits are defined as talks involving top politicians or ministers following the similar study of Choi (2020). Table  1 below shows the two categories of high-level events in the data set. A meeting is identified as level 1 if either the participants from both the EU member country or from China were top political leaders or if on one side a top political leader participated. The 271 level 1 meetings are sorted into five different catego- ries as shown below in Table  1. Level 2 meetings occurred without any top polit- ical leaders, but with the participation of high-level politicians (e.g., ministers or Ministry of Foreign Affairs of the People’s Republic of China: https:// www. fmprc. gov. cn/ web/ (last visited 06–03-2020). 1 3 S. Choi commissioners). The categories are divided following Choi (2020) for convenience of study but are not identical to the dictionary definition of high-level summit talks. Interactions that took place via telephone call or exchange of letters are not included, even if they took place among the top politicians. The event does not differentiate between different locations where summit talks took place. In terms of the stock price data, the Airbus stock prices in the French stock mar- ket are used in this study. The Airbus stock belongs to the CAC 40 market index of the French stock market, so the CAC 40 index is applied for the benchmarking mar- ket index analysis. The usage of the market index will be explained further in detail when the method is discussed in the subsequent part of this section. The most essential part of the event study analysis is to obtain the abnormal return of the stock price after the event because the event study examines the unex- pected influence of events on the stock price. The event study methodology has developed various models to capture the abnormal return of stock prices for the best usage of the cases (Cable and Holland 1999). Among the various event study mod- els (e.g., constant-mean-return model), this study uses the market model to identify abnormal returns of the Airbus stock price. The market model is the most frequently used in event studies. This model expects a constant linear relationship between the stock price and the market index and calculates the abnormal return taking account of the fluctuation of the market index portfolio that includes the observed stock itself (Mackinley 1997). In this study, as stated above, the CAC 40 index is applied as the market benchmark return. Compared to the constant-mean-return model, the market model reduces the variance of the abnormal return. The market model also adjusts market risk and firm-specific risk in abnormal return (Scholtens and Boersen 2011), and lastly, it helps to analyze the abnormal return with less noise. For example, when summit talk takes place, it would influence the stock price of Airbus if the hypothe- sis of this paper works. At the same time, the overall stock market is also fluctuating according to the market trend. The market model already includes these trends via “index” one can minimize the abnormal movement which is caused by the general market situation or trend. Therefore, if summit talks influence general atmosphere of the stock market of France or CAC40 index, that effects are already reflected in the model, and the abnormal return of Airbus stock price suggests that it is a signifi- cant change beyond the market trend. For these reasons, this study adopts the market model and expects to get more sound result than the constant-mean-return model. This study applies one calendar year as an estimation window (period). As the name indicates, the estimation window is the time period across which this method observes the stock price movements. Using the stock price data within this estima- tion window, the expected return of the stock price is set for shorter periods that cor- respond to the “event window (observation period).” Excluding weekends and holi- days, 260 trading days remain for calculating the parameters of the expected returns of the stock. After calculating the expected returns, this value will be compared to the actual return during the event window. The difference between the actual returns during the event window, as observed in the stock market, and the calculated esti- mated returns is defined as the abnormal return. Abnormal returns occur very fre- quently, almost always, but only when abnormal returns differ significantly from the expected return can we conclude that the event had an impact on the stock price. 1 3 Measuring economic diplomacy using event study method: the… Some studies include a pre-event window in the observation period consider- ing that the stock price could have been influenced already before the event take place (Mackinley 1997). Likewise, summit talks of the EU and Chinese politi- cians are usually announced in advance. The visit of top politician and economic delegation symbolizes a good economic atmosphere between the two countries for sure. Therefore, it looks appropriate to include the pre-event days in the obser- vation period. Therefore, this study includes the pre-event windows. This way, we gather more information about the market reaction. For this purpose, the event window is subdivided into eight different lengths: − 1, − 3, − 5, 10 days before the event and + 1, + 3, + 5, and + 10  days after the event. On this basis, a cumulative average abnormal return (CAAR) will be also calculated and reported. To estimate the expected return of the stock, a simple regression formula, as shown below, is applied. R =  +  R + (1) it i i mt it In the formula, i stands for stock, and t is the period (day) making R the stock it return of company i at period t. Respectively, R stands for the market return at mt period t, and  stands for the mean disturbance term. On this basis, an abnormal it return can be derived as AR = R − E(R ) (2) it it it where AR means the abnormal stock return of company i in period t , which belongs it to the event window. R is the actual stock return of the same stock in the same it period, while E(R ) represents the expected return for stock iinperiodt . Through the it formula, AR can be obtained, but the statistically meaningful difference between it the expected return and the real return should be observed to identify the effect of the event. In this particular study, the statistically meaningful abnormal return of Airbus stock price should be detected to assess the influence of economic diplomacy of the EU and China to the market. The significance can be tested by the generalized rank t-test in the case that a normal distribution of returns is confirmed. For the analysis, the individual abnormal returns should be aggregated. Aggre- gation can be done in various ways. The average abnormal returns can be calcu- lated by dividing the sum of the abnormal returns by the number of events. Given N number of events, the average abnormal return (AAR) is as follows: AR = AR (3) t it i=1 And its variance is as follows: var AR = 2 i=1 i Also, it is possible to calculate CAAR which is the sum of the average abnor- mal returns. Calculating the cumulative average abnormal return requires the assumption that event windows do not overlap with each other. Cumulative abnormal return of stock i is. 1 3 S. Choi CAR t , t = AR i 1 2 it (4) t=t where t and t should be between the event period, which is T < t ≤ t ≤ T 1 2 1 1 2 2 (Mackinley 1997; Campbell et al. 2010). Finally, the CAAR can be also calculated as follows: CAR t , t = CAR (t , t ) (5) 1 2 i 1 2 i=1 The CAAR value can be helpful for analysis in addition to the AAR because it shows the aggregate effect of the abnormal returns, and the variance of CAAR is as follows: var CAR t , t =  (t , t ) (6) 1 2 1 2 2 i=1 Data have been analyzed according to the method stated above. The result will be discussed in the following section. Result In this section, the result of the analysis will be presented. This paper asked about the effects of economic diplomacy of the EU and China by observing the influence of summit talks on the stock price returns of Airbus. The entire 1028 summit talks were analyzed, with separate attention to the relevant categories introduced above (see Table 1). First, the findings of all summit talks, level 1, and level 2 summit talks will be reported. The specific categories of level 1 summit talks suggested in Table  1 will follow in the latter part of this section. Table 2 presents the results for the three different categories of summit talks, all summit talks, level 1, and level 2 summit talks. Based on the market return model, each category of data sets is examined to cal- culate the average abnormal return of observed date, cumulative average abnormal returns. Also, each CAAR value is tested for significance using a generalized rank t-test. The result in Table  2 includes eight different event windows with the period of [0, T]. Table  2 shows that the AAR of Airbus stock has positive values after the sum- mit talks for the all summit talks category and level 1 summit talks. For the level 2 summit talks, the event date and 1 day after the event had positive values but had a negative abnormal return on the third day. Before the summit talk, the stock price had negative values. The AAR values can be also presented in a cumulative way with cumulative average abnormal returns. CAAR of Airbus stock has positive val- ues after the summit talks in all cases. This means that after the summit talks, the stock price of Airbus has increased, and in some cases, the changes are statistically significant to be “abnormal.” For example, if someone purchased Airbus stock on the day of the event and sold it on 3rd day [0, + 3] between the observed time period of 2002 and 2018, this person could make 0.00343% of return at a 99% of chance, 1 3 Measuring economic diplomacy using event study method: the… Table 2 AAR, CAAR, and general t-test result for all summit talks, level 1, and level 2 summit talks Period All summit talks Level 1 Level 2 AAR CAAR AAR CAAR AAR CAAR (generalized (generalized (generalized t-test) t-test) t-test) [− 10, 0] − 0.00054 0.00034 − 0.00001 0.00070 − 0.00073 0.00021 (0.16366) (0.16781) (0.09418) [− 5, 0] − 0.00039 0.00065 − 0.00034 − 0.00044 − 0.00041 0.00104 (0.42322) (− 0.14352) (0.62153) [− 3, 0] − 0.00008 0.00136 − 0.00081 0.00114 0.00018 0.00145 (1.08285) (0.45280) (1.05351) [− 1, 0] 0.00042 0.00122 0.00037 0.00097 0.00044 0.00131 (1.37161) (0.54434) (1.35355) 0 0.00080 0.00059 0.00088 [0, + 1] 0.00116 0.00196 0.00321 0.00380 0.00042 0.00130 (2.20027)** (2.14311)** (1.34014) [0, + 3] 0.00054 0.00343 0.00232 0,00,892 − 0.00010 0.00146 (2.71887)*** (3.55317)*** (1.06372) [0, + 5] 0.00019 0.00346 0.00030 0,01,016 0.00015 0.00106 (2.24308)** (3.30469)*** (0.63323) [0, + 10] 0.00018 0.00400 0.00016 0.01073 0.00019 0.00159 (1.91291)* (2.57847)*** (0.69697) *, **, and ***Significant at 10%, 5%, and 1% confidence level, respectively and this return is abnormal as compared to the market movement of the period. This result is the same for the period [0, + 5] with the 95% chance. When it comes to the level 1 meeting, the return is even higher with the strong significance. However, level 2 talks did not have any significance even though the CAAR had positive val- ues in general. One can assume that the work level dialogues do not have a signifi- cant influence to the market. The observed events are also exceeding 750 cases, and one can assume that the event is not rare nor influential. Graph 1 presents the AAR of the three categories presented in Table  1 between the time period of [0, + 10]. As the graph presents, all three categories react right after the event, and the size of the effect becomes smaller as time passes by. To observe the tendency, this paper applied the 10  days of event windows before and after the event day, but one can also notice that the effect of the event disappears by day 5. Table 3 below presents the investigated result of the specific categories of level 1 talks. This table also reports the AAR, CAAR of Airbus stock price, and the gener- alized t-test results. As presented in Table  3, the level 1 meetings are divided into four different categories. First is when both top politicians are involved in the summit talks. And also, when Xi Jinping is involved in the meeting and when Xi Jinping had a meeting with France and Germany are included in the categories. The reason 1 3 S. Choi AAR of all meengs, level 1 and level 2 meengs 0.004 0.003 0.002 All meengs 0.001 Level 1 Level 2 0123456789 10 -0.001 -0.002 Graph 1 Average abnormal returns of Airbus stock according to the meeting types for including Xi Jinping in the categories is to observe his influence in economic diplomacy and whether his presence has a stronger effect compared to the previ- ous leaders of China. When both top politicians are involved in the summit talk, the cumulative abnormal return stayed positive after the event, and event day had a high aver- age abnormal return. One can assume that the market perceives the summit talk events positively, especially when both politicians are involved. The CAAR val- ues had 95% significance for the [0, + 3] and [0, + 5] event windows. After Xi Jinping became President, he had in total 36 summit talks with EU top politicians. For these events, the analysis confirms that all CAAR values are positive after the event and also the event day itself had a high average abnormal return. After the event days, AAR had negative values, but due to the high AAR of the event day, the overall CAAR stays as positive. However, the t-test result suggests that the positive CAAR is not statistically significant. When Xi Jinping had summit talks with France and Germany, the event day had a positive AAR. However, the meeting with France had no significant impact, while the meetings with Angela Merkel from Germany had a significantly positive effect on CAAR. With the result above, even though significance levels vary, it is possible to say that economic diplomacy between the EU and China in the form of level 1 summit talks generally had a positive influence on the Airbus stock prices. Graph 2 below shows the AAR changes of level 1 summit talks. With the graph, it is clear to see that in general, the stock price goes up after the event (day 0), and the effect lasts for the next days. Graph 2 presents the average abnormal return of Airbus stock according to the level 1 meeting types. All AAR value of the event days is positive, and one can argue that the event itself had the impact to the stock price of Airbus. However, the graph fluctuates after the event date. Still, the values stay positive mostly. The effect disappears after 5 days. 1 3 Measuring economic diplomacy using event study method: the… 1 3 Table 3 AAR, CAAR, and general t-test result for level 1 summit talks in detail When both top leaders are involved With President Xi Xi Jinping with France Xi Jinping with Germany Period AAR AAR AAR AAR CAAR CAAR CAAR CAAR (generalized t-test) (generalized t-test) (generalized t-test) (generalized t-test) [− 10, 0] − 0.00066 0.00146 − 0.00036 0.00203 0.00527 0.02948 − 0.00620 − 0.00414 (0.20973) (0.27374) (2.24068)** (− 0.28303) [− 5, 0] − 0.00119 0.00206 0.00321 0.00287 0.01231 0.02214 − 0.00455 0.00311 (0.40074) (0.52402) (2.27893)** (0.28787) [− 3, 0] − 0.00042 0.00392 − 0.00057 0.00277 0.00363 0.01080 − 0.00345 0.00615 (0.93382) (0.61923) (1.36153) (0.69687) [− 1, 0] 0.00072 0.00189 − 0.00091 0.00073 0.00423 0.00497 − 0.00205 0.00386 (0.63472) (0.23037) (0.88547) (0.61808) 0 0.00116 0.00164 0.00074 0.00591 [0, + 1] 0.00261 0.00377 − 0.00007 0.00158 − 0.00308 − 0.00235 0.00599 0.01190 (1.26801) (0.49753) (− 0.41818) (1.90637)* [0, + 3] 0.00430 0.00996 − 0.00107 0.00277 0.00379 0.00056 − 0.00178 0.01738 (2.37055)** (0.61864) (0.07052) (1.96896)** [0, + 5] − 0.00036 0.01156 − 0.00181 0.00272 − 0.00071 0.00336 0.00163 0.02267 (2.24627)** (0.49662) (0.34627) (2.09782)** [0, + 10] 0.00129 0.01304 − 0.00023 0.00318 − 0.00332 − 0.00301 0.00188 0.01099 (1.87267)* (0.42834) (− 0.22909) (0.75117) *, **, and ***Significant at 10%, 5%, and 1% confidence level, respectively S. Choi AAR of level 1 meengs by types 0.008 With Xi Jinping 0.006 0.004 Xi Jinping with France 0.002 Xi Jinping with 0123456789 10 Germany -0.002 -0.004 When both top policians are -0.006 involved -0.008 -0.01 Graph 2 Average abnormal returns of Airbus stock according to the level 1 summit talk types Discussion and conclusion Even though economic diplomacy has become a crucial element of modern diplo- macy, and a major task for governments and organizations like the EU, not much research has been done on the effect and influence of it in quantitative terms. There- fore, the biggest contribution of this study is that it suggests a method to quantify and measure it. This study explored the influence of the economic diplomacy between the EU and China using the summit talks as a proxy, the event study as a method, and the Air- bus stock price as an object of economic diplomacy. In total, 1028 events of summit talk between the EU and China and their sub-categories were analyzed. The results suggest that when top politicians are involved in the summit talks between the EU and China, stock market participants perceive the event as positive news for Airbus, and the event is reflected in the stock price of Airbus with positive abnormal returns. The result was statistically significant and robust. Market reactions were immedi- ate and lasted for roughly 5 days after the event. Among all, the summit talks, talks which involves both top political leaders and summit talks with Germany, had a strong impact. There are several limits in this study. In contrast to the points on the connection between economic diplomacy and summit talks presented earlier, one could argue that using summit talks as a proxy of economic diplomacy is not appropriate. Also, this argument can go further criticizing that summit talk is not directly influencing the stock price of Airbus. However, this method can be further developed for measuring the eco- nomic diplomacy with the different diplomatic events or other industries and compa- nies. Also, this data can be used as additional information to the qualitative assessments of the economic diplomacy practices. Secondly, the study left out many characteristics of summit talks that might influence outcomes, like, for example, the diplomatic cli- mate of the summit talks, whether they were held in a positive or negative atmosphere. 1 3 Measuring economic diplomacy using event study method: the… Usually, it is considered that the summits between top leaders are thoroughly prepared at lower levels and therefore do not have to deal with negative agenda items and gen- erally produce positive outcomes. Still, one could analyze the statements of summit talks by context and categorize it into different moods for further analysis. Lastly, the aviation industry does not represent all the business sectors between the EU and China. Therefore, it is not appropriate to expect a similar result in other industries. Still, it would be meaningful to extend this study to other relevant sectors to get a better under- standing of the economic impact of economic diplomacy. Similarly, this study can be extended to the China-USA summit talks and the abnormal return of Boeing. It would be also meaningful to study the Chinese stock market with the same summit talk events that applied in this study. The high levels of significance in abnormal returns on Airbus stocks suggest that summit talks between the EU and China, and more broadly economic diplomacy, do have an impact on economic agents and markets. To specify further what kind of impact one can expect, under what conditions, and in which industrial sectors, further research will be needed. Author contribution Full contribution. Funding This study was jointly funded by the KNAW (Royal Netherlands Academy of Arts and Sci- ences) China Exchange Program. Data availability Event data and stock price data are available. Code availability Not available. Declarations Ethics approval Not needed. Consent to participate Not needed. Consent for publication Agree. Conflict of interest The author declares no competing interests. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Com- mons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. 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Measuring economic diplomacy using event study method: the case of EU-China summit talks and Airbus stock price changes

Choi, Sunkung
Asia Europe Journal , Volume 21 (2) – Jun 1, 2023
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Abstract

Economic diplomacy receives growing interest in the field of international relations research ever since the end of the cold war. Despite the vast number of literature on economic diplomacy, there are not many studies measuring the effect of economic diplomacy quantitatively. The purpose of this paper is to propose a method to meas- ure economic diplomacy using the event study method that observes the influence of specific events on stock prices. In this study, the summit talks between the EU and China are selected as specific events that are considered as a form of economic diplomacy, and Airbus stock price, the proxy of the reaction to the economic diplo- macy, was observed to verify the influence of it. The study categorized the summit talks by the type of participants whether the top politicians were included or not. The result shows that, among all summit talks, the summit talks between top politi- cians between the EU and China influence the stock price of Airbus positively, and it is statistically significant. Introduction Increasing numbers of political science papers discuss the growing involvement of modern diplomacy in economic and business relations with other countries. Lee and Hocking (2010) point out that these changes are remarkable compared to the pre- vious role of diplomacy that focused more on security and state power relations. So-called economic diplomacy has become the most crucial part of modern diplo- macy. Top politicians are aware that they cannot only focus on domestic economic issues but should deal with this dimension of foreign affairs. Eventually, those foreign affairs are related to the economic development of the country (Melissen 2003). Even though the term economic diplomacy is widely used, the definition and * Sunkung Choi s.choi@rug.nl Faculty of Economics and Business, University of Groningen, Groningen, the Netherlands Vol.:(0123456789) 1 3 S. Choi concept of it are often vague, and the concerned area is wide-ranging from econom- ics to politics. Economic diplomacy can be understood as the activity through which diplomats and politicians, together with business people, promote and facilitate eco- nomic opportunities between their countries or groups of countries. If necessary, they institutionalize regulations for further investments or trade. For this reason, economic diplomacy is of major interest for all countries these days. The European Union (EU) has, for a long time, been practicing its economic diplomacy as a tool for increasing its influence on world politics. Since the EU does not have a strong motivation for gaining hard power (Michalski 2005), the economic diplomacy of the EU is considered more as a soft power and a diplomatic strategy to enhance its political and economic relationship with its partner countries (Smith 2016, Stoddard 2017, Vasilovschi 2017, Lee and Hocking 2010). Especially when it comes to the foreign economic policy of the EU toward China, considering the unique Chinese market model in which the Communist Party plays an important role, a great effort of politicians and diplomats is required to promote sound eco- nomic relation between the two sides (Liu et al. 2018). China joined the World Trade Organization (WTO) in December 2001. Since then, China has rapidly integrated itself into the global economy in trade and investment relations including the EU. In 2003, the EU and China established the Comprehensive Strategic Partnership, which aims to strengthen the bond between the two areas. After a “honeymoon” period and subsequent adjustment, the two seem to have reached a stable relation- ship in political and economic matters (Li et al. 2017). When it comes to practicing economic diplomacy, there are many types. Among others, summit talks are among the most common ways of practicing it, especially bilateral. The thematic focus of summit talks has broadened progressively in modern diplomacy. Nowadays, it is no longer limited to major political topics but includes more and more economic issues (Melissen 2003). Unlike multilateral summit talks, which may cover a wide range of non-territorial issues such as environment, finan- cial aid, international crime, and migration, bilateral summit talks often target the economic dimension of the relationship (Melissen 2003). Summit diplomacy can be done in several different ways, such as exchanges of letters, telephone calls, and physical meetings. Regarding physical meetings, for example, a state visit, such events are often accompanied by economic delegations. This signals to the public that there is political support for the business and economic relations of the two regions. The purpose of this paper is to explore the economic effect of EU-China eco- nomic diplomacy. Among many methods to study this, the present research explores the effect of summit talks between the EU and China in the stock market. Depending on their perceptions among the public, or at least the audience of financial market players, summit talks can be expected to have positive, neutral, or negative effects on stock market returns. In addition to many conventional political science articles that have studied the influence of economic diplomacy using a qualitative approach (Smith 2014, Okano-Heijmans 2016, Okano-Heijmans and Montesano 2016a, Okano-Heijmans and Montesano 2016b), this paper hopes to contribute to this field of literature by offering a piece of quantifiable evidence with a case study on market returns on Airbus stocks prices by adopting the method of Choi (2020) and 1 3 Measuring economic diplomacy using event study method: the… developing it. In particular, the current study applies more detailed data segmen- tation than Choi (2020). This gives a chance to observe the economic diplomacy before and after President Xi is on his chair. Also, shorter windows are applied to avoid other events’ influence on the stock market. The structure of this paper is as follows. The following section will discuss the summit talks between the EU and China and their connection to the aviation indus- try to explain to what extent both are related and why they can be a suitable study object for research on economic diplomacy. The third section will introduce and pre- sent the data sets, namely, the series of summit talks between the EU and China. Also, this section will explain the event study as a research method. After discussing the result of the study, the discussion and conclusion will be presented in the last section of this paper. The EU‑China summit talks and the aviation industry Melissen (2003) mentions that in international affairs, summit talks started to deal with more economic topics step by step as the world has been becoming more inter- dependent and globalized. A series of economic crises and globalization have cre- ated a situation in which high politicians cannot neglect international economics and economic institutions. In most cases, even political issues during summit talks are eventually related to international business, trade, and investments. For instance, the multilateral summit talks that led to the Paris Agreement of 2015 discussed how to reduce the emission of greenhouse gases, and yet, economists and business people almost immediately engaged in calculations on the implications of it for the national and global economy, and in terms of business opportunities and risks. Indeed, with or without intention, most of the summit talks are eventually related to economics. In 2014, Chinese President Xi visited EU countries with a delegation including 200 business people. He visited the Netherlands, France, Germany, and Belgium as well as the headquarters of the EU in Brussels with the delegation during this trip. The delegation included representatives of major Chinese companies such as the Bank of China, BAIC motors (Beijing motors), SAIC motors (Shanghai motors), and CASHC (China Aviation Supply Holding Company). Throughout the visits, the del- egation signed a series of contracts and Memorandums of Understanding (MOUs) with the companies and research institutes of the counterpart countries. Particularly in France, CASHC agreed to purchase 70 passenger airplanes from Airbus. In the Netherlands, China’s biggest food company, COFCO acquired 51% of the stock of a Dutch grain trader, Nidera Seeds. Also, the delegation made an MOU with Wage- ningen University for corporative research in the food industry and with Dutch car- rier KLM for passenger airplane lease and loan. In the following year, President Xi visited the UK, and 150 business people accompanied his travel. The scale of the delegation increased to 500 business people when President Xi visited Italy in 2019. Following the successful summit talks, the Chinese companies signed several con- tracts with Italian companies to collaborate in various fields such as energy, finance, steel, and construction, with a total volume of more than 2.5 billion euros. Italy stated that it was ready for further economic cooperation with China in the context 1 3 S. Choi of the Belt and Road Initiative. Those few examples indicate that the summit talks of modern diplomacy, especially in the relations between China and the EU, are closely connected to economics and business cooperation. As a methodology, this study applies an event study method. An event study observes whether there are significant abnormal returns in stock price when a spe- cific “event” takes place. In this study, the event will be summit talks between the EU and China. By observing stock price changes of the day of the event or the fol- lowing days and analyzing whether there are abnormal returns after the events or not, it is possible to measure the economic impact of summit talks, as stock markets would reflect the summit talk event into the stock price if it is considered to be rel- evant. Particularly, this study observes Airbus stock prices in the stock market. Many industries are closely related to politics and political events such as con- struction and banking. Among many state-related industry sectors, this study par- ticularly focuses on the aviation industry with a focus on the Airbus stock in France. The passenger airplane market is an ideal case to observe the influence of economic diplomacy for many reasons. First of all, the passenger airplane market is relatively simple to investigate due to its characteristic structure, with only two major sellers in the international market, Airbus and Boeing. Also, it is known that the Chinese airline industry is highly regulated by the government. Due to the high price of air- planes, purchase decisions are known to be political rather than purely commercial (Choi 2020; Heicks 2010). Like purchasers, sellers also operate in a context that is politically shaped. Lynn (1995) discussed the dynamics of politics in this market and relates them to the fact that airplane orders from customers are both crucial and severely contested, thus motivating top leaders to get involved in the promotion of the companies. He mentioned in his book that the former President of France, Fran- çois Mitterrand, and the former President of the USA, Bill Clinton, were the best salesmen for Airbus and Boeing. A more recent study (Galy and Germain 2007) also mentions that competition between the two companies is not only taking place in the market but also in international politics, or in other words economic diplomacy matters. Soft loans and direct subsidies from the governments are another evidence that both companies’ business is not merely driven by market mechanisms but also depends on the support of the governments (Choi 2020). If we turn to China and its aviation industry, China became one of the biggest buyers of passenger airplanes in the world. As China is one of the fastest-growing economies in the world and covers a huge domestic territory, the demand of pas- senger airplane has only been growing. For example, between 1980 and 2007, the average growth rate of the air traffic in China was 18% per year that almost doubles the country’s GDP growth and is three times the world’s average air traffic growth rate during the same period (Choi 2020; Haoting 2008; Leong and Chen 2008). Therefore, it is obvious that the two biggest passenger airplane makers in the world, Airbus and Boeing compete with each other to increase their sales in the fastest- growing market in the world. Statistical data show that in the last 20  years, both companies have been increasing their sales in China (Choi 2020). Airbus has entered the passenger airplane market as a latecomer in 1970, and since then, the company has constantly increased its market share against Boeing (Galy and Germain 2007). Due to the character of the aviation industry, especially 1 3 Measuring economic diplomacy using event study method: the… the high entry barrier related to the fact that it requires tremendous capital invest- ment and high technology, a consortium of European countries has supported the business ever since the establishment of the company. By locating Airbus’ first assembly line outside of the EU in China in 2008 and producing A320 on site, Airbus has been trying to expand its capacity and influence in China. Airbus has achieved coverage of 50% of the passenger airplane market in China in 2020. Indeed, the business and sales of Airbus are highly relevant to the EU-China eco- nomics and also, predictably, political relations (Choi 2020). After a few of the summit talks between leaders from the EU or its member states and their Chinese counterparts, announcements have been released that China would purchase passenger airplanes from Airbus. For example, after the talks between the German chancellor, Angela Merkel, and Chinese President, Xi Jinping, in July 2017, the China Daily announced that China would order 140 Airbus planes for 22 bil- lion dollars  (CGTN 2017). Reuters announced that China would order 184 A320 airplanes from Airbus after the summit talks between the French President, Emma- nuel Macron, and Xi Jinping on 10 January 2018 (Rose 2018). Therefore, economic diplomacy between the EU and China can have a direct impact on the purchasing decisions of Airbus customers in China, and, relatedly, the company value of Air- bus. This further demonstrates the relevance of the aviation industry and Airbus stock price changes as an object of study to observe the influence of economic diplo- macy between the EU and China. This paper, therefore, asks to what extent the eco- nomic diplomacy of the EU and China, with a focus on summit talks, influences the stock price of Airbus. Data and method The event study relies on the “rational market theory” for the analytical logic. The rational market theory assumes that all participants in the market utilize all relevant information in short time or simultaneously. Therefore, the theory expects that new information would be directly reflected in the stock price if the news were relevant to the business of that company (Campbell et  al. 2010). Hence, when we extend this assumption to the topic of the current study, it is possible to assume that if the economic diplomacy of the EU and China, namely, the summit talks between them, has any relevance for listed companies, stock market participants would exploit this information, and this would lead to changes in stock prices. This is how this research employs the method for measuring the economic diplomacy. When the market return is statistically abnormal (out of the normal range), either negative or positive, it is possible to assume that the political event influences the stock market. There- fore, this method allows us to see the immediate reaction of the market toward the summit talks. In this study, particularly, Airbus stock is of interest. https:// www. airbus. com/ compa ny/ world wide- prese nce/ china. html (last visited: April 25, 2021). https:// www. reute rs. com/ news/ pictu re/ airbus- china- contr act- for- 184- a320- jets- idUSK BN1EZ 0BZ (last visited: April 25, 2021). 1 3 S. Choi Originally, the event study method was developed to verify the influence of busi- ness events on the stock price. Therefore, the main topics of such event studies are related to business issues such as merger and acquisition news (Rani et  al. 2015), companies’ performance announcements and dividend announcements (Suwanna 2012; Anwar et al. 2015), news of bankruptcy (Lang and Stulz 1992; Jayanti 2011), announcements of a new product development (Lee and Chen 2009; Pauwels et al. 2003), and the introduction of new regulations in the market from the government side as it influences the performance of related companies (Lamdin 1999). The method has been extended in other fields as well, and researchers started to analyze the influence of non-business or non-economic events such as disasters. Some have explored the effect of earthquakes on the stock market returns (Ferreira and Karali 2015; Takao et al. 2013), whereas others have studied the influence of unusual acci- dents such as gas explosions on the stock market return (Scholtens and Boersen 2011). Similar to the purpose of this paper, there are also many papers which are analyz- ing the influence of political events on economics. For example, there are various studies that explore the stock market reaction to the BREXIT referendum that deter- mined that the UK would leave the EU (Ramiah et al. 2017; Breinlich et al. 2018). Besides, Liu et al. (2018) explore the impact of political connections on firm values in China by an event study. Kim and Roland (2014) and Huh and Pyun (2018) tested whether the political tension between South and North Korea and North Korea’s missile launches influence the South Korean stock market returns using the event study method. The US elections are another widely applied political topic for event study research (Leblang and Bumba 2005, Obradovic and Tomic 2017). Brans and Scholtens (2020) have explored if the Twitter messages of US President Trump influence the US stock market. They use tweets by President Trump that include company names as events. When it comes to summit talk, it is not easy to find papers that apply event study methodology. One recent paper (Pham et al. 2019) has explored the effect of the North Korea-US summit on the South Korean stock mar - ket. The study shows that the news of summit talks between North Korea and US influenced the South Korean stock market negatively. There are already some papers which applied event study in the aviation industry. Galy and Germain (2007) have checked the influence of news about orders on the price of Airbus and Boeing stocks by an event study method. The findings of the study show that order news in general increases the stock price of the corresponding company and decreases the stock price of the counterpart. Adopting the literature that investigates the direct connection between order news and company value (Galy and Germain 2007), and summit talks and the stock markets (Pham et al. 2019), this study asks whether the political event “summit talk” influences by itself a specific company’s stock price returns. One could argue that the mechanism of the stock price changes is not clear whether it is the effect of the “order announcement” which is followed by the sum- mit talk or it is the summit talk event itself. This study assumes the latter case is how economic diplomacy influences the stock price of Airbus. As the first case has been already studied by Galy and Germain (2007), it is possible to assume that the order news influences to the stock price for sure. This study, however, wants to see 1 3 Measuring economic diplomacy using event study method: the… Table 1 Composition of the Summit talks types by participants Observation (N) sample (1028 events) Level 1 meeting (high-level summit talks) 271   One top politician 189   Both side top politicians 82     Xi Jinping summits 36       with France 10       with Germany 9 Level 2 meeting (working dialogues) 757 As Table  1 illustrates, level 1 meetings are divided according to the participating figures. This sub-division is necessary to identify the dynamics of economic diplomacy between the EU and China. For example, through this division, one can observe the economic diplo- macy of President Xi separately from other events whether the political event which is considered to be as an economic diplomacy practice also influences the stock price of relevant industry and, eventually, one can measure it. Also, one should notice that not every summit talk announces the order of airplanes. If we still capture the economic diplomacy in a quantifiable manner, we can apply the suggested method of this paper for other country and industry for measuring the effect of economic diplomacy. As the name of the method implies, it is very important to identify the event itself to observe its effect on the stock price. This study collected all summit talks between the EU and China that have occurred between January 2002 and August 2018 to form an event set. The reason for collecting the data from January 2002 is that China joined the WTO in December 2001 and China and the EU established a Comprehen- sive Strategic Partnership in the following year. The events were collected from the Chinese Ministry of Foreign Affairs website where all bilateral meetings are listed. In total, 2033 summit talk events have been identified between January 2002 and August 2018. The 2033 summit talks include all types and levels of talks from high- level summits to regular practical conversation meetings that are published on the webpage of the Ministry of Foreign Affairs. From among these events set, high-level summit talks were selected for the analysis. They amount to 1028 events. The high- level summits are defined as talks involving top politicians or ministers following the similar study of Choi (2020). Table  1 below shows the two categories of high-level events in the data set. A meeting is identified as level 1 if either the participants from both the EU member country or from China were top political leaders or if on one side a top political leader participated. The 271 level 1 meetings are sorted into five different catego- ries as shown below in Table  1. Level 2 meetings occurred without any top polit- ical leaders, but with the participation of high-level politicians (e.g., ministers or Ministry of Foreign Affairs of the People’s Republic of China: https:// www. fmprc. gov. cn/ web/ (last visited 06–03-2020). 1 3 S. Choi commissioners). The categories are divided following Choi (2020) for convenience of study but are not identical to the dictionary definition of high-level summit talks. Interactions that took place via telephone call or exchange of letters are not included, even if they took place among the top politicians. The event does not differentiate between different locations where summit talks took place. In terms of the stock price data, the Airbus stock prices in the French stock mar- ket are used in this study. The Airbus stock belongs to the CAC 40 market index of the French stock market, so the CAC 40 index is applied for the benchmarking mar- ket index analysis. The usage of the market index will be explained further in detail when the method is discussed in the subsequent part of this section. The most essential part of the event study analysis is to obtain the abnormal return of the stock price after the event because the event study examines the unex- pected influence of events on the stock price. The event study methodology has developed various models to capture the abnormal return of stock prices for the best usage of the cases (Cable and Holland 1999). Among the various event study mod- els (e.g., constant-mean-return model), this study uses the market model to identify abnormal returns of the Airbus stock price. The market model is the most frequently used in event studies. This model expects a constant linear relationship between the stock price and the market index and calculates the abnormal return taking account of the fluctuation of the market index portfolio that includes the observed stock itself (Mackinley 1997). In this study, as stated above, the CAC 40 index is applied as the market benchmark return. Compared to the constant-mean-return model, the market model reduces the variance of the abnormal return. The market model also adjusts market risk and firm-specific risk in abnormal return (Scholtens and Boersen 2011), and lastly, it helps to analyze the abnormal return with less noise. For example, when summit talk takes place, it would influence the stock price of Airbus if the hypothe- sis of this paper works. At the same time, the overall stock market is also fluctuating according to the market trend. The market model already includes these trends via “index” one can minimize the abnormal movement which is caused by the general market situation or trend. Therefore, if summit talks influence general atmosphere of the stock market of France or CAC40 index, that effects are already reflected in the model, and the abnormal return of Airbus stock price suggests that it is a signifi- cant change beyond the market trend. For these reasons, this study adopts the market model and expects to get more sound result than the constant-mean-return model. This study applies one calendar year as an estimation window (period). As the name indicates, the estimation window is the time period across which this method observes the stock price movements. Using the stock price data within this estima- tion window, the expected return of the stock price is set for shorter periods that cor- respond to the “event window (observation period).” Excluding weekends and holi- days, 260 trading days remain for calculating the parameters of the expected returns of the stock. After calculating the expected returns, this value will be compared to the actual return during the event window. The difference between the actual returns during the event window, as observed in the stock market, and the calculated esti- mated returns is defined as the abnormal return. Abnormal returns occur very fre- quently, almost always, but only when abnormal returns differ significantly from the expected return can we conclude that the event had an impact on the stock price. 1 3 Measuring economic diplomacy using event study method: the… Some studies include a pre-event window in the observation period consider- ing that the stock price could have been influenced already before the event take place (Mackinley 1997). Likewise, summit talks of the EU and Chinese politi- cians are usually announced in advance. The visit of top politician and economic delegation symbolizes a good economic atmosphere between the two countries for sure. Therefore, it looks appropriate to include the pre-event days in the obser- vation period. Therefore, this study includes the pre-event windows. This way, we gather more information about the market reaction. For this purpose, the event window is subdivided into eight different lengths: − 1, − 3, − 5, 10 days before the event and + 1, + 3, + 5, and + 10  days after the event. On this basis, a cumulative average abnormal return (CAAR) will be also calculated and reported. To estimate the expected return of the stock, a simple regression formula, as shown below, is applied. R =  +  R + (1) it i i mt it In the formula, i stands for stock, and t is the period (day) making R the stock it return of company i at period t. Respectively, R stands for the market return at mt period t, and  stands for the mean disturbance term. On this basis, an abnormal it return can be derived as AR = R − E(R ) (2) it it it where AR means the abnormal stock return of company i in period t , which belongs it to the event window. R is the actual stock return of the same stock in the same it period, while E(R ) represents the expected return for stock iinperiodt . Through the it formula, AR can be obtained, but the statistically meaningful difference between it the expected return and the real return should be observed to identify the effect of the event. In this particular study, the statistically meaningful abnormal return of Airbus stock price should be detected to assess the influence of economic diplomacy of the EU and China to the market. The significance can be tested by the generalized rank t-test in the case that a normal distribution of returns is confirmed. For the analysis, the individual abnormal returns should be aggregated. Aggre- gation can be done in various ways. The average abnormal returns can be calcu- lated by dividing the sum of the abnormal returns by the number of events. Given N number of events, the average abnormal return (AAR) is as follows: AR = AR (3) t it i=1 And its variance is as follows: var AR = 2 i=1 i Also, it is possible to calculate CAAR which is the sum of the average abnor- mal returns. Calculating the cumulative average abnormal return requires the assumption that event windows do not overlap with each other. Cumulative abnormal return of stock i is. 1 3 S. Choi CAR t , t = AR i 1 2 it (4) t=t where t and t should be between the event period, which is T < t ≤ t ≤ T 1 2 1 1 2 2 (Mackinley 1997; Campbell et al. 2010). Finally, the CAAR can be also calculated as follows: CAR t , t = CAR (t , t ) (5) 1 2 i 1 2 i=1 The CAAR value can be helpful for analysis in addition to the AAR because it shows the aggregate effect of the abnormal returns, and the variance of CAAR is as follows: var CAR t , t =  (t , t ) (6) 1 2 1 2 2 i=1 Data have been analyzed according to the method stated above. The result will be discussed in the following section. Result In this section, the result of the analysis will be presented. This paper asked about the effects of economic diplomacy of the EU and China by observing the influence of summit talks on the stock price returns of Airbus. The entire 1028 summit talks were analyzed, with separate attention to the relevant categories introduced above (see Table 1). First, the findings of all summit talks, level 1, and level 2 summit talks will be reported. The specific categories of level 1 summit talks suggested in Table  1 will follow in the latter part of this section. Table 2 presents the results for the three different categories of summit talks, all summit talks, level 1, and level 2 summit talks. Based on the market return model, each category of data sets is examined to cal- culate the average abnormal return of observed date, cumulative average abnormal returns. Also, each CAAR value is tested for significance using a generalized rank t-test. The result in Table  2 includes eight different event windows with the period of [0, T]. Table  2 shows that the AAR of Airbus stock has positive values after the sum- mit talks for the all summit talks category and level 1 summit talks. For the level 2 summit talks, the event date and 1 day after the event had positive values but had a negative abnormal return on the third day. Before the summit talk, the stock price had negative values. The AAR values can be also presented in a cumulative way with cumulative average abnormal returns. CAAR of Airbus stock has positive val- ues after the summit talks in all cases. This means that after the summit talks, the stock price of Airbus has increased, and in some cases, the changes are statistically significant to be “abnormal.” For example, if someone purchased Airbus stock on the day of the event and sold it on 3rd day [0, + 3] between the observed time period of 2002 and 2018, this person could make 0.00343% of return at a 99% of chance, 1 3 Measuring economic diplomacy using event study method: the… Table 2 AAR, CAAR, and general t-test result for all summit talks, level 1, and level 2 summit talks Period All summit talks Level 1 Level 2 AAR CAAR AAR CAAR AAR CAAR (generalized (generalized (generalized t-test) t-test) t-test) [− 10, 0] − 0.00054 0.00034 − 0.00001 0.00070 − 0.00073 0.00021 (0.16366) (0.16781) (0.09418) [− 5, 0] − 0.00039 0.00065 − 0.00034 − 0.00044 − 0.00041 0.00104 (0.42322) (− 0.14352) (0.62153) [− 3, 0] − 0.00008 0.00136 − 0.00081 0.00114 0.00018 0.00145 (1.08285) (0.45280) (1.05351) [− 1, 0] 0.00042 0.00122 0.00037 0.00097 0.00044 0.00131 (1.37161) (0.54434) (1.35355) 0 0.00080 0.00059 0.00088 [0, + 1] 0.00116 0.00196 0.00321 0.00380 0.00042 0.00130 (2.20027)** (2.14311)** (1.34014) [0, + 3] 0.00054 0.00343 0.00232 0,00,892 − 0.00010 0.00146 (2.71887)*** (3.55317)*** (1.06372) [0, + 5] 0.00019 0.00346 0.00030 0,01,016 0.00015 0.00106 (2.24308)** (3.30469)*** (0.63323) [0, + 10] 0.00018 0.00400 0.00016 0.01073 0.00019 0.00159 (1.91291)* (2.57847)*** (0.69697) *, **, and ***Significant at 10%, 5%, and 1% confidence level, respectively and this return is abnormal as compared to the market movement of the period. This result is the same for the period [0, + 5] with the 95% chance. When it comes to the level 1 meeting, the return is even higher with the strong significance. However, level 2 talks did not have any significance even though the CAAR had positive val- ues in general. One can assume that the work level dialogues do not have a signifi- cant influence to the market. The observed events are also exceeding 750 cases, and one can assume that the event is not rare nor influential. Graph 1 presents the AAR of the three categories presented in Table  1 between the time period of [0, + 10]. As the graph presents, all three categories react right after the event, and the size of the effect becomes smaller as time passes by. To observe the tendency, this paper applied the 10  days of event windows before and after the event day, but one can also notice that the effect of the event disappears by day 5. Table 3 below presents the investigated result of the specific categories of level 1 talks. This table also reports the AAR, CAAR of Airbus stock price, and the gener- alized t-test results. As presented in Table  3, the level 1 meetings are divided into four different categories. First is when both top politicians are involved in the summit talks. And also, when Xi Jinping is involved in the meeting and when Xi Jinping had a meeting with France and Germany are included in the categories. The reason 1 3 S. Choi AAR of all meengs, level 1 and level 2 meengs 0.004 0.003 0.002 All meengs 0.001 Level 1 Level 2 0123456789 10 -0.001 -0.002 Graph 1 Average abnormal returns of Airbus stock according to the meeting types for including Xi Jinping in the categories is to observe his influence in economic diplomacy and whether his presence has a stronger effect compared to the previ- ous leaders of China. When both top politicians are involved in the summit talk, the cumulative abnormal return stayed positive after the event, and event day had a high aver- age abnormal return. One can assume that the market perceives the summit talk events positively, especially when both politicians are involved. The CAAR val- ues had 95% significance for the [0, + 3] and [0, + 5] event windows. After Xi Jinping became President, he had in total 36 summit talks with EU top politicians. For these events, the analysis confirms that all CAAR values are positive after the event and also the event day itself had a high average abnormal return. After the event days, AAR had negative values, but due to the high AAR of the event day, the overall CAAR stays as positive. However, the t-test result suggests that the positive CAAR is not statistically significant. When Xi Jinping had summit talks with France and Germany, the event day had a positive AAR. However, the meeting with France had no significant impact, while the meetings with Angela Merkel from Germany had a significantly positive effect on CAAR. With the result above, even though significance levels vary, it is possible to say that economic diplomacy between the EU and China in the form of level 1 summit talks generally had a positive influence on the Airbus stock prices. Graph 2 below shows the AAR changes of level 1 summit talks. With the graph, it is clear to see that in general, the stock price goes up after the event (day 0), and the effect lasts for the next days. Graph 2 presents the average abnormal return of Airbus stock according to the level 1 meeting types. All AAR value of the event days is positive, and one can argue that the event itself had the impact to the stock price of Airbus. However, the graph fluctuates after the event date. Still, the values stay positive mostly. The effect disappears after 5 days. 1 3 Measuring economic diplomacy using event study method: the… 1 3 Table 3 AAR, CAAR, and general t-test result for level 1 summit talks in detail When both top leaders are involved With President Xi Xi Jinping with France Xi Jinping with Germany Period AAR AAR AAR AAR CAAR CAAR CAAR CAAR (generalized t-test) (generalized t-test) (generalized t-test) (generalized t-test) [− 10, 0] − 0.00066 0.00146 − 0.00036 0.00203 0.00527 0.02948 − 0.00620 − 0.00414 (0.20973) (0.27374) (2.24068)** (− 0.28303) [− 5, 0] − 0.00119 0.00206 0.00321 0.00287 0.01231 0.02214 − 0.00455 0.00311 (0.40074) (0.52402) (2.27893)** (0.28787) [− 3, 0] − 0.00042 0.00392 − 0.00057 0.00277 0.00363 0.01080 − 0.00345 0.00615 (0.93382) (0.61923) (1.36153) (0.69687) [− 1, 0] 0.00072 0.00189 − 0.00091 0.00073 0.00423 0.00497 − 0.00205 0.00386 (0.63472) (0.23037) (0.88547) (0.61808) 0 0.00116 0.00164 0.00074 0.00591 [0, + 1] 0.00261 0.00377 − 0.00007 0.00158 − 0.00308 − 0.00235 0.00599 0.01190 (1.26801) (0.49753) (− 0.41818) (1.90637)* [0, + 3] 0.00430 0.00996 − 0.00107 0.00277 0.00379 0.00056 − 0.00178 0.01738 (2.37055)** (0.61864) (0.07052) (1.96896)** [0, + 5] − 0.00036 0.01156 − 0.00181 0.00272 − 0.00071 0.00336 0.00163 0.02267 (2.24627)** (0.49662) (0.34627) (2.09782)** [0, + 10] 0.00129 0.01304 − 0.00023 0.00318 − 0.00332 − 0.00301 0.00188 0.01099 (1.87267)* (0.42834) (− 0.22909) (0.75117) *, **, and ***Significant at 10%, 5%, and 1% confidence level, respectively S. Choi AAR of level 1 meengs by types 0.008 With Xi Jinping 0.006 0.004 Xi Jinping with France 0.002 Xi Jinping with 0123456789 10 Germany -0.002 -0.004 When both top policians are -0.006 involved -0.008 -0.01 Graph 2 Average abnormal returns of Airbus stock according to the level 1 summit talk types Discussion and conclusion Even though economic diplomacy has become a crucial element of modern diplo- macy, and a major task for governments and organizations like the EU, not much research has been done on the effect and influence of it in quantitative terms. There- fore, the biggest contribution of this study is that it suggests a method to quantify and measure it. This study explored the influence of the economic diplomacy between the EU and China using the summit talks as a proxy, the event study as a method, and the Air- bus stock price as an object of economic diplomacy. In total, 1028 events of summit talk between the EU and China and their sub-categories were analyzed. The results suggest that when top politicians are involved in the summit talks between the EU and China, stock market participants perceive the event as positive news for Airbus, and the event is reflected in the stock price of Airbus with positive abnormal returns. The result was statistically significant and robust. Market reactions were immedi- ate and lasted for roughly 5 days after the event. Among all, the summit talks, talks which involves both top political leaders and summit talks with Germany, had a strong impact. There are several limits in this study. In contrast to the points on the connection between economic diplomacy and summit talks presented earlier, one could argue that using summit talks as a proxy of economic diplomacy is not appropriate. Also, this argument can go further criticizing that summit talk is not directly influencing the stock price of Airbus. However, this method can be further developed for measuring the eco- nomic diplomacy with the different diplomatic events or other industries and compa- nies. Also, this data can be used as additional information to the qualitative assessments of the economic diplomacy practices. Secondly, the study left out many characteristics of summit talks that might influence outcomes, like, for example, the diplomatic cli- mate of the summit talks, whether they were held in a positive or negative atmosphere. 1 3 Measuring economic diplomacy using event study method: the… Usually, it is considered that the summits between top leaders are thoroughly prepared at lower levels and therefore do not have to deal with negative agenda items and gen- erally produce positive outcomes. Still, one could analyze the statements of summit talks by context and categorize it into different moods for further analysis. Lastly, the aviation industry does not represent all the business sectors between the EU and China. Therefore, it is not appropriate to expect a similar result in other industries. Still, it would be meaningful to extend this study to other relevant sectors to get a better under- standing of the economic impact of economic diplomacy. Similarly, this study can be extended to the China-USA summit talks and the abnormal return of Boeing. It would be also meaningful to study the Chinese stock market with the same summit talk events that applied in this study. The high levels of significance in abnormal returns on Airbus stocks suggest that summit talks between the EU and China, and more broadly economic diplomacy, do have an impact on economic agents and markets. To specify further what kind of impact one can expect, under what conditions, and in which industrial sectors, further research will be needed. Author contribution Full contribution. Funding This study was jointly funded by the KNAW (Royal Netherlands Academy of Arts and Sci- ences) China Exchange Program. Data availability Event data and stock price data are available. Code availability Not available. Declarations Ethics approval Not needed. Consent to participate Not needed. Consent for publication Agree. Conflict of interest The author declares no competing interests. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Com- mons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. 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