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Yoshi Heffernan
Copyright: 2017 Gopal, Greenwood. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
In recent years, the American public has been continually traumatized by mass shootings; events where individuals suffering from mental health issues or psychological trauma and access to firearms open fire on strangers in seemingly senseless acts of violence [1]. Although scholars and policy makers have speculated at length regarding the impetus for such events, one plausible explanation which continually has surfaced is the easy access to firearms in the US [2]. In 2013, for example the Washington Post reported that among OECD countries, the US had the highest number of firearms per capita, as well as the highest gun-related deaths per capita [3]. However, while the origin of such events has been studied extensively (the mental health of shooters being indicted as the primary catalyst [4]), one aspect of mass shootings and gun violence remains understudied: the response of financial markets to such events. More specifically, if firearm manufacturers are held responsible by financial markets for manufacturing the very products used in these incidents. This broad question: how financial markets respond to these events in terms of the stock prices of firearm manufacturers, forms the core of the research reported in this paper.
While the details of each event differ, all represent seemingly senseless acts of violence where close family members, co-workers, and even relative strangers were adversely affected through the use of firearms. As firearms are centrally implicated in these events, extant theory would suggest two potential responses. On the one hand, considerable anecdotal data, and some recent research, shows a sharp spike in firearm purchasing immediately after such events; suggesting an arming of individuals [6, 7]. The Financial Times of London, for example, reported that gun sales jumped 52% in the year after Newtown, CT [8]. Alternatively, mass shootings increase the calls for additional gun control, regulation, mental health checks, and gun registration [9]. For instance, the 2014 mass shooting in Santa Barbara, CA spurred calls for greater gun control by parents of the victims, thereby making them highly salient [10]. The effects of such regulations, pending their legislative enactment, would likely introduce significant controls and restrictions on the sales of firearms in the US, thereby undermining firm profitability in the long term. This dichotomy of responses to these shootings illuminates a central tension about how the market may respond to manufacturers of firearms.
Beyond the immediate effect of mass shootings on the stock prices of firearms manufacturers, there are further likely to be moderating effects to the long-term valuations of firearms firms based on the circumstances surrounding the event. Events like Newtown and Columbine struck a chord with society as the victims included children. Similarly, the use of automatic weapons and handguns has raised the profile of certain mass shootings [11]. Thus, as an extension of our base research question, we also consider how specific circumstances about the event, such as the victims including children, the use of handguns, and the location of the shooting, affect market response.
In terms of economic impact, results show that each mass shooting leads to a penalty of between 22.4 and 49.5 basis points, per day, imposed on firearms stocks. With the market capitalization of Smith & Wesson (Ruger), at roughly $509.11mm ($677.65mm) on January 1, 2015, this translates to a $5mm ($6.7mm) equity loss over two days alone. While these drops in stock price do not manifest in the long term, i.e. movement is not significantly different from the market after a 10-day window, analysis shows that in the immediate aftermath of the event, there is a significant drop in price. Given that firearms stocks are generally volatile, the unpredictable shock of a mass shooting viewed over a 5-day period levied roughly a 1.25% negative effect on the price on average, representing almost half of the daily volatility.
Mass shootings have been the subject of considerable research in the literature on criminology, health policy, and economics. Within each stream of research, the focus has differed in terms of the questions asked. Within criminology, the relevant questions posed pertain to the role that handguns play [21] as well as the extent to which the right to conceal arms can contribute to such events [22]. Within public health, the antecedents of mass shootings have been studied, such as the role of mental health [23] as well as the impact of media and censorship [1, 24]. Research in healthcare has also addressed the psychological consequences of mass shootings: such as the potential subsequent spikes in the suicide rate based on the easy availability of firearms [25], as well as the impact on psychiatric disorders like depression, post-traumatic stress disorder, and drug addiction [26]. In this vein, received research has widely observed that the most common method of suicide in both Australia and the United States comes from firearms [27, 28], both of which can be lowered by reducing access to firearms. Further, state-level ownership of firearms, and the resulting consequences, appears to be particularly inimical for women; Siegel and Rothman [29], for example, show how increases in firearm ownership is linked with increases in the rate of femicide. Finally, in the public health literature, considerable work has addressed the twin questions of how to curb gun-related violence as well as to how to manage its aftermath within the communities where they occur [30].
Within the domain of economics, the most closely related to the work presented here, relatively little work has studied the implications of mass shootings. Cross and Pruitt [16], who examine how the Aurora CO and Newton CT mass shootings affect the stock prices of firearm firms as well as those of the theatre company (Cinemark) where the shooting occurred, represents the nearest analog. In other work, scholars have addressed how policy changes in the right to carry concealed guns has led to spillover effects in neighborhoods [31] as well as the role of assault weapons [32]. The relationship between mass shootings and the resulting increase in demand for guns has also been studied [6], as has the impact of elections and the associated fear of impending regulations on the demand for guns [33]. Yet, within this stream there is a significant gap in our understanding of how mass shootings directly affect the response of the financial markets, i.e. the stock prices of firearm manufacturers. Further, we have limited visibility into whether these effects are moderated by characteristics of the event. This forms of the core of the work we present here.
Why would a seemingly random event such as a mass shooting affect the stock price of a firearm manufacturer? We explore arguments for why mass shootings may positively affect stock prices, through increased short-term demand for guns, as well as why the effects may be negative, through increased stigma and associated threats of regulation. It is this tension between the competing explanations that we address through our empirical analysis.
Anecdotal evidence for why an investor may find firearms stocks attractive, because of a mass shooting, is available in a variety of forms. Significant evidence in the popular press attests to the notion that gun sales increase significantly after a mass shooting [35, 36]. While, traditionally, data on the actual link between mass shootings and gun sales has been difficult to come by, interviews with firearm stores and firearm enthusiasts indicate this to be true. More recently, empirical research has further corroborated the observation that mass shootings appear to be linked to a significant increase in the applications for firearms licenses [6], thereby, potentially, leading to greater firearm sales. Thus, as a first-order effect, mass shootings appear to increase firearm sales, thereby leading to higher valuation for the firms that manufacture them.
Two plausible explanations exist as to why mass shootings might lead to increased short-term sales. First, a large section of the public in the U.S. views gun ownership as a first step towards protection from crime [2, 37]. In systematic surveys, Barry et al [23] provide a more nuanced view on public opinion; namely that general gun owners like National Rifle Association (NRA) members are more tolerant of guns in society and express the sentiment that guns are useful as protective devices. Non-gun owners diverge sharply, often expressing the need for greater gun control and laws, such as banning the use of automatic weapons for recreational purposes. These differences notwithstanding, surveys by the Pew Research Center [38] and the Economist [39] suggest that, in the aggregate, there appears to be little change in the overall opinion across the country even after mass shootings. Therefore, for gun buyers and members of shooting associations who believe in the value of firearms for protection, the salience provided by events such as mass shootings are likely to lead to greater demand for firearms in the short-run.
From a firm value perspective, the increased possibility of firearm sales would lead to an enhanced valuation of the firm. In such cases, we would expect an increasing number of fund managers to increase their holdings in such stocks, thereby driving up demand for firearm stock. Since short-term supply is relatively fixed, this should lead to a short-term increase in the price of the firearm stock, leading to a new equilibrium price. Anecdotal evidence for such effects can be observed, both from individual investors [34] as well as algorithmically traded funds [41]. Further, the improved outlook for firm revenues in the wake of a mass shooting may reduce the incentive for fund managers to divest from such stocks, even if individual customers are unwilling to carry them. For example, the New York City Retirement System retained ownership in firearm stocks despite recent calls by the New York City Mayor Bill de Blasio called for their divestment [42]. Thus, via the individual decisions by fund managers to increase holdings, as well as an increasing reluctance to divest, a positive short-term effect of mass shootings may manifest, pushing prices up to a new equilibrium price.
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