Stock Market's View of Gun Control: It's Coming

SMITH BRAIN TRUST -- Surveys show little change in American attitudes toward gun control after mass shootings, and gun sales have been going up in recent years. But the stock market may tell a different tale.

Investors appear to be skeptical of the long-term prospects of the gun industry's business model, according to new scholarship produced at the University of Maryland's Robert H. Smith School of Business.

Mass-shooting incidents tend to cause gun sales to go up, partly because the presence of weapons in society becomes more "salient" — harder to ignore — and people turn to guns to defend themselves. If that trend were to continue, in perpetuity, then one would expect investors to be bullish on gun company stocks. (And indeed, both the number of guns manufactured and background checks conducted hit record levels in 2013, the most recent year for which data are available.) On the other hand, if investors believe that society will eventually enforce stricter gun rules, then that belief ought to reveal itself in the value of those companies' stocks.

To determine which scenario was uppermost in investors' minds, Anand Gopal, an associate professor at the Smith School, and Brad N. Greenwood, an assistant professor at Temple University's Fox School of Business (and a Smith Ph.D. graduate), looked at the performance of gun-company stocks after 93 mass shooting episodes involving at least four victims, from January 2009 to September 2013.

Gopal and Greenwood focused on Smith & Wesson and Sturm, Ruger, & Company, the two publicly traded gun companies. (Most such companies are private held.) They found that those companies stock had declined significantly at every interval they measured following shootings:  at 2 days, 5 days, 10 days and 30 days. Beyond that , the authors said, other factors beyond shootings might confuse the results, making cause-and-effect attribution harder.

The steepness of the stock-price declines was partly determined by characteristics of the shooting. "The punitive effect is exacerbated the more people are slain," says Greenwood. Stock declines also were steeper if a handgun was used (possibly because handguns are subjected to more government regulation than rifles). However, the presence of children among the victims--as in Newtown, Conn., where 20 children and seven adults were murdered in Dec. 2012—did not have an effect, even though those shootings receive especially dramatic press coverage.

In all, Gopal and Greenwood estimated that mass shootings cost Smith and Wesson $32.1 million in market capitalization, and Ruger $42 million.

The work adds to the literature on investors' attitudes toward so-called "sin" industries: those that are legal but which some investors blame for societal ills. People may tell pollsters that they don't want substantial gun control, but investors are predicting that the current state of affairs is unsustainable. "Firearms have a tradition in the US, based on history, but as mass shootings become more salient there is likely to be a re-examination of the role of firearms in society," Gopal says. "Our analysis appears to be picking up some of these dynamics, but from the stock market."

"Traders, Guns, and Money," by Anandasivam Gopal and Brad N. Greenwood, is a working paper.

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