This paper addresses the impact of terrorism on Pakistan Stock Exchange (PSX) in the wake of „war on terror‟. Being a front line country in the „war on terror, Pakistan witnessed a number of terrorist attacks across the whole country. This research analyses the 90 terrorist events happened across six major cities (Karachi, Islamabad, Lahore, Peshawar, Rawalpindi, and Quetta) for 33 listed firms over the period of 2000-2011 using event study method. The sample years (2000-2011) are used in the research paper as most of the terrorist attacks in Pakistan took place in this period, according to Global Terrorism Database. Any unexpected returns around various terrorist events are calculated by market model and market adjusted model. Any significant unexpected returns in stock prices vis_x0002_à-vis terrorist attacks conform the existence of semi-strong form of Efficient Market Hypothesis (EMH). The results indicate that, on average, the terrorist events do not have a significant negative impact on the stock returns on announcement date; instead, significant negative unexpected returns are documented a day after the event dates. The findings nullify the semi-strong form of efficiency. The only exception is significant negative returns for median value on announcement date which confirms the existence of efficiency in semi-strong form. However, the significant negative values after the announcement date confirm that share returns take time to incorporate new public information at the PSX. It may be one explanation for insignificant unexpected returns on announcement date as the negative effect prevails after the event date. The findings are useful for regulators to work on improving the market efficiency and for investors to devise policies keeping the negative effect of terrorism on stock exchange.