The Valuation Effect of Corporate and Government Contracting

Date of Graduation

Fall 1994


Master of Business Administration


Management and Information Technology

Committee Chair

Fayes Elayan


This study examined abnormal stock market returns to equity holders around large, nondefense contract announcements that were made in the Wall Street Journal between January 1, 1982 and December 31, 1992. Of the 637 contract announcements found, 295 were not contaminated by other announcements and had sufficient CRSP data to enter the final sample that was analyzed for excess returns to the contract winning companies (contractee). Excess returns were also analyzed for contract giving companies (contractor). Contracts ranged in size from $3 million to $4 billion. the Asymmetric Information Hypothesis and Information Content Hypothesis were used to develop hypotheses that predict contract announcement abnormal returns. The Market Model was used to analyze abnormal returns for both the contract giving (contractee) and contract receiving (contractor) companies. As expected, statistically significant cumulative average excess returns were found for contractee companies, but not for contractor companies. Contractee excess returns were also examined for different contractor groups, including U.S. contractees transacting with other corporations, as opposed to transacting with governmental agencies. Also, the international or domestic nature of the contractor is analyzed for differences in abnormal returns. Contrary to expectations, the market reacted with significant abnormal returns for corporate sector contracts, and did not react to contracts announced with governmental organizations. Also, domestic contracting received excess returns while international contracting did not. Finally, cross-sectional regression models are developed to test the statistical significance of firm size, and the ratio of contract size to firm size variables. Contractee firm size and relative contract size were found to have significant impact on cumulative average excess returns. Dummy variables were included in the contractee cross-section model to account for the international and governmental status of the contractor, but they were statistically insignificant to the model.The contractor's firm size, and the relative contract size were also statistically insignificant in effecting abnormal returns for their equity.

Subject Categories

Business Administration, Management, and Operations


© Dan T. Shepherd