Tuesday, September 27, 2022

Firearms stocks rise after mass shootings as investors rule out the possibility of tightening gun laws

The day an armed 18-year-old entered Robb Elementary School in Uvalde, Texas and shot and killed 19 children and two teachers, the stock prices of gun and weapons makers soared.

A week has passed and after the latest mass shooting, the gun stock market is not taking its name to stop. As of the close of trading on May 31, 2022, the share price of arms maker Sturm Ruger was up more than 6.6% from May 23, the day before the shooting. For Smith & Wesson, the boom was even more marked, with shares at Uvalde more than 12% off the stock price before the mass murder.

But that relationship — a spike in gun industry stocks following a mass shooting — wasn’t always the case. My colleague Anand Gopal and I studied the impact of 93 mass shootings on the share price of publicly listed firms from 2009 to 2013. We found that, unlike what happens now, the stock price declined in that period after the mass shootings. Smith & Wesson and Sturm Ruger, two gun companies still publicly listed in the US

So why has it changed? The answer may lie in how much hope for legislation on tighter restrictions on gun sales has waned over the past decade. Investors no longer worry as much about the prospect of tightening firearms regulation when assessing the long-term viability of gun manufacturers after the mass shootings.

Let’s look at the factors that affect the valuation of such stocks after the mass shootings. First you have a growing demand for weapons. Research has shown that gun sales rise after a high-profile shooting, as Americans “hands up,” both out of a perceived concern for their safety and out of fear of tighter sanctions.

The thinking is simple: “I better buy firearms while I still can, before the law makes it harder for me to do so.” This increased demand would, in itself, boost the market value of gun and ammunition manufacturers by providing an unexpected financial advantage.

But then you have the counter factor: Any talk of stricter rules on gun sales jeopardizes the long-term viability of companies by reducing future cash flows. The business model of gun manufacturers, after all, is to sell an increasing number of firearms to the public. Any restrictions or restrictions on what types of weapons you can buy – or even who can buy a firearm – will limit their ability to increase profits.

Over the period we saw, investors seemed to lean more into this fear of future legislation, as seen in the low valuations of publicly listed firearm companies following the mass shootings. Our research showed that firearms stocks were fined over two-, five- and 10-day windows as a result of mass shootings from 2009 to 2013. That is to say, the cumulative abnormal fall in the share price over that period would be followed by a mass shooting. The penalty was around 1.25% over a period of five days.

Interestingly, as we watched over the years, things began to change. Negative stock market reactions to mass shootings subsided in the years following our study, suggesting that the threat of any regulatory measures was not as keenly felt by investors.

Inaction on gun control at the federal level – and easing of regulations among some states – since our work has seemingly rebalanced the two main factors at play. Yes, there is a boom in demand for gun sales even after the mass shootings. But fears of possible regulations on gun sales have subsided.

The stock price jump of Smith & Wesson and Sturm Ruger following the Uvalde school shooting provides strong evidence that firearms stocks now rise after such incidents. A similar effect was seen after the 2018 mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida.

But there is a problem when it comes to simply saying that there is a link. One of the scariest things is the statistical model we used in our research that no longer works. Reason: There are simply too many mass shootings in America. They happen with such frequency that we cannot apply this kind of analysis to look at the impact of individual incidents and the impact of the stock market on gun companies.

In fact, according to the Gun Violence Archive, there were 18 more mass shootings in the US in the seven days following the Uvalde shootings.

Nation World News Desk
Nation World News Deskhttps://nationworldnews.com
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