response of parent companies. To this end, it separately looks at the impact of the announcements of major initiatives on the returns of parent companies operating in industries that are likely to have dierent sensitivities to taxation and economic prospects.

Resource extraction is typically considered an enclave industry, whose rents are readily taxed, and even expropriated, especially so if they are foreign owned (Engel and Fischer (2008)), and investment and production in these industries is sensitive to ownership risk (Bohn and Deacon (2000)). Also, resource extraction produces commodities sold in global markets, so gross prots in this industry depend little on the economic growth of the host country. Thus, it can be expected that this industry would benet relatively more by a reduction in expected future taxes than by an improvement in future economic conditions. On the contrary, the performance of rms in nontradable service industries depends mainly on local economic conditions and, at the same time, for political economy reasons, these industries may be a less tempting target for taxes because they tend to be more labor intensive. Therefore, the dierential response of stock returns of parent companies operating in resource extraction versus companies operating in services can be used to test whether the positive stock return impact of major announcements documented above comes mainly from the market's assessment of better economic prospects for the beneted countries or from a reduction in expected taxes.

The evolution of cumulative abnormal returns and their corresponding 90 percent condence bands for companies in resource extraction and service industries, as well as the dierence in _CAR_ between these two industries during a 10-day window around the announcement of major initiatives is reported in Figure 13. The gure shows that the _CAR_ experiences a larger and more signicant increase around the event day for parent companies in resource extraction (Panel A) than in services (Panel B). While the _CAR_ of resource companies reaches ve percentage points and is statistically signicant at 10 percent level since day zero, those of service companies only climb up to one percentage point and is statistically signicant at 12 percent. This dierential response can be clearly seen in Panel C, which shows that _CAR_ of companies in resource industries is higher than those of companies in service industries, and that this dierence is signicantly dierent from zero in various post event dates (days, 3, 7, and 8) Thus, under the assumption that stock prices of companies in resource extraction industries are relatively more responsive to expected taxation than those of companies in the service sector, the stronger positive stock returns' response of the former relative to the latter suggests that the positive market response to announcements of major debt relief initiatives documented in the baseline estimates is mostly due to an expected reduction in future taxation rather than improved economic prospects.

The evidence in Figure 13 also helps to dispel the possibility that the abnormal returns could come from rms in non-tradable industries beneting from a real appreciation resulting from the increase in net aid inows associated with debt relief (Rajan and Subramanian, 2005a; Rajan and Subramanian, 2005b). However, if this mechanism were driving the results, the resource producing industries, which are tradable, should experience a smaller abnormal stock price response than 18