Market Response to Racial Uprisings

In 2020, the Black Lives Matter (BLM) movement gained significant traction in the United States following the killing of George Floyd. The movement, which resulted in the largest sustained protest in U.S. history, sparked numerous debates about the role of policing in the U.S. and how it intersects with systemic racism (New York Times, 2020).  Many in the BLM movement, which popularized the slogan “Defund the Police,” advocate for shifting funds from police departments to non-policing alternatives. In Market Response to Racial Uprisings, we study how such uprisings influence firms with connections to law enforcement. Specifically, do demands for racial justice damage companies that contract heavily with the police? Or does social unrest only amplify demands for policing and increase the profitability of such firms?

We document the effect of major events related to the BLM movement on the stock prices of firms related to policing. Events include the acquittal of George Zimmerman in July 2013, the killing of Michael Brown in August 2014, and the killing of George Floyd in 2020. Unlike police budgets, stock prices provide real-time, forward-looking responses to such viral incidents. We identify firms that are strongly connected to policing using directories of vendors from policing conferences, magazines, and websites from 2010 to 2022 and text analysis of publicly traded firms’ 10-Ks. We create a control group of firms in similar industries and locations to those of the policing firms but that do not contract with police, enabling us to identify the causal effect of BLM-related events on policing firms’ performance.

Our central finding is that in the weeks following incidents triggering BLM uprisings, strongly-connected policing firms experienced a stock price increase of seven percentage points relative to the stock prices of comparable non-policing firms. As one might expect, the larger the event, the larger the effects: the killing of George Floyd led to excess returns of 16.5 pp for policing firms relative to the returns of their non-policing peers. These short-term gains lead to large long-run returns: between the killing of Trayvon Martin in 2012 (the event that later sparked the BLM movement) and December 2020, a portfolio passively holding shares of strongly connected policing firms would have increased 76 percentage points more than a portfolio of their non-policing peers.

These results are in stark contrast to the predictions of experts. We conduct a survey of economic experts, and we find that the majority of experts surveyed expected the 2020 BLM protests to yield little to no change or a slight decrease in the stock values of policing firms. They often accounted for their expectations by citing the pushes for police reform or budget cuts associated with “defunding the police.” In other words, the surveyed economists tended to associate the events of summer 2020 with police reform and the reductions in police funding while expecting a negligible impact on the financial performance of policing firms. The underestimation of police firm performance is not unique to economists: in a related paper, we observe similar results for law and finance experts.

To better contextualize these results, we differentiate between three potential investor theses, each reflecting a specific policy response to a BLM event, such as a viral police killing: 1. Policymakers could reduce funding to the police and increase funding toward alternatives, consistent with the abolition of policing, resulting in lower profits for firms dealing with law enforcement (“defund”); 2. Concerns over social unrest and crime could drive heightened funding for police departments aimed at crime control (“crime-control”); 3. Policy could target reforming the police through training and technology, which will benefit firms providing such services and products, in an attempt to reduce police misconduct and the likelihood of future incidents (“reform”).

The “crime-control” investor thesis is consistent with the dominant policy response to crime in recent U.S. history, which focuses on crime control and providing resources for police to identify, investigate, and fight crime without accounting for the negative externalities associated with policing. Recently, proponents often advocate deploying more resources in surveillance technologies and investing in predictive policing. The “reform” thesis is in line with policy responses to police misconduct and police brutality, where adherents prioritize reforming the police through accountability tools such as body-worn cameras and improved training. The “defund” thesis asserts that “abolitionist” policy is likely to be implemented. Abolitionism has only recently gained mainstream prominence and focuses on eliminating government spending on the police and reallocating that spending to police alternatives, such as community-based accountability, housing and healthcare for all, and improved mental health resources, in line with calls to “defund the police.”

Given that policing firms performed significantly better than their non-policing peers following BLM events, we rule out the possibility that the market, in contrast with expert predictions, believed a large-scale defunding of police and law enforcement would occur. We attempt to distinguish between crime control- and reform-focused policing firms by classifying the products and services they sell to police departments. We use hand-collected information on firms’ products and services and classify them into dozens of categories then map those to either “crime-control” — e.g., firearms, restraints, surveillance equipment — or “reform” — e.g., body-worn cameras, recorders, training. We find that firms dealing in both crime-control and reform products and services benefitted largely from the BLM movement. These results are driven primarily by investments in firms that provide surveillance technologies and body-worn cameras. Overall, our findings indicate that investors expected the BLM movement to increase public spending on policing for both reform- and crime control–focused products and services rather than leading to funding reductions or “defunding” of police.

Using the events of summer 2020 as a case study, we add further context to the main results. The valuation of the twenty firms strongly connected to policing increased by almost half a billion dollars in the weeks following the killing of George Floyd. Investors’ positive expectations were born out by policing firms’ future performances: in the two years following George Floyd’s killing, these firms experienced higher profits attributable to an increase of almost one billion dollars in sales and reduced costs of goods sold.

In summary, the results suggest that investors had no expectations that abolitionist demands of “defunding the police” would succeed. Rather, they likely expected the BLM racial uprisings to increase profits for firms contracting with police departments focusing on crime-control and reform. In brief, our research shows how high-profile violence against Black Americans and calls for systemic change translate into gains via the public market for shareholders of stocks of firms contracting with police.