# **4 Results**

## **4.1 Conflict exposure, sales, total costs, and profits**

Table 1 presents our main results. Column 1 shows that conflict exposure leads to a large and statistically significant decline in firm sales. This effect remains robust in column 2 after the inclusion of firm-level controls. Based on our estimates, a one-standard-deviation increase in the number of conflict events occurring within a 20 km radius of the firm during the last fiscal year (eight events) leads to a 2.8% reduction in median sales, equivalent to 10,050 USD. Higher conflict exposure also leads to a significant decline in total production costs, measured by expenditures on raw materials, intermediate inputs, and labor (column 3). Results do not change including controls (column 4).

These reductions in both sales and total costs could reflect changes in either prices or quantities. Although the WBES dataset does not allow us to directly test for price changes, it is unlikely that conflict lowers consumer or input prices.<sup>15</sup> This suggests that the observed declines in sales and total production costs are mainly driven by a contraction in output and a reduction in the quantity of inputs and materials used in production.

Finally, our results show that conflict exposure does not affect a firm’s profits (columns 5 and 6).<sup>16</sup> This null effect is consistent with the fact that higher conflict exposure affects both sales and total costs in the same direction, suggesting that firms respond to reduced sales by cutting production costs.<sup>17</sup> As these adjustments result in reduced output, it follows that, while surviving firms’ profitability remains unchanged, overall economic activity is negatively impacted by conflict-related violent events.

**Threats to identification** The firm-level fixed effects in our baseline specification account for all time-invariant firm, sector, and geographical characteristics. However, our estimates may still capture some factors that vary over time at the local level and are simultaneously correlated with the number of conflict events as well as the firm’s economic performance. To address this concern, we augment model 1 with a full set of area-time interacted fixed effects to also control for all time-varying, location-specific determinants of firm performance, such as infrastructure availability and local labor market characteristics.<sup>18</sup>

> 15Previous studies find that conflict typically raises consumer and input prices (Amodio and Di Maio, 2018; Utar, 2024; Del Prete et al., 2023; Couttenier et al., 2022).

> 16Due to the coverage of the WBES, the null effect on profits applies only to surviving firms that remain formal—that is, those observable in subsequent survey waves. However, not all firms exiting the sample necessarily go bankrupt. As discussed in Section 4.2.3, conflict may also induce firms to shift to the informal sector, causing them to disappear from our sample (which includes only formal firms) while continuing to operate in the economy.

> 17While the average effect of conflict exposure on profits is null, in Section 4.3, we discuss the firm and country characteristics for which profits decrease with conflict exposure.

> 18 _Area_ is the most granular geographical unit of observation in the WBES and represents the sampling region. There are 314 areas, and they are typically larger than the 20 km radius buffer used to construct our conflict exposure measure.

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