TY  - JOUR
AU  - DellaVigna,Stefano
AU  - Ferrara,Eliana La
TI  - Detecting Illegal Arms Trade
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13355
PY  - 2007
Y2  - August 2007
UR  - http://www.nber.org/papers/w13355
L1  - http://www.nber.org/papers/w13355.pdf
N1  - Author contact info:
Stefano DellaVigna
University of California, Berkeley
Department of Economics
549 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-0715
Fax: 510/642-6615
E-Mail: sdellavi@econ.berkeley.edu

Eliana La Ferrara
Universita' Bocconi
Dept of Economics
via Roentgen 1
20136 Milano
Italy
Tel: 3902-58363328
E-Mail: eliana.laferrara@unibocconi.it
AB  - Illegal arms are responsible for thousands of deaths in civil wars every year. Yet, their trade is very hard to detect. We propose a method to statistically detect illegal arms trade based on the investor knowledge embedded in financial markets. We focus on eight countries under UN arms embargo in the period 1990-2005, and analyze eighteen events during the embargo that suddenly increase or decrease conflict intensity. If the weapon-making companies are not trading or are trading legally, an event worsening the hostilities should not affect their stock prices or affect them adversely, since it delays the removal of the embargo. Conversely, if the companies are trading illegally, the event may increase stock prices, since it increases the demand for illegal weapons. We detect no significant effect overall. However, we find a large and significant positive reaction for companies head-quartered in countries where the legal and reputation costs of illegal trades are likely to be lower. We identify such countries using measures of corruption and transparency in arms trade. We also suggest a method to detect potential embargo violations based on stock reactions by individual companies, including chains of reactions. The presumed violations are higher for conflicts with more UN investigations and for companies with more Internet stories regarding embargo.
ER  -