The budgets of wars: Analysis of the U.S. defense stocks in the Post-Cold War era

Constantin Gurdgiev, Aaron Henrichsen and Andrew Mulhair

International Review of Economics & Finance, 2022, vol. 82, issue C, 335-346

Abstract: In this study, we consider the effects of the U.S military participation in direct and indirect foreign conflicts, defense budget announcements, and various political factors have on the abnormal returns to five largest U.S. defense companies’ share prices. We conducted this analysis by using a fixed effect panel approach along with event studies, using quarterly data over 30 years, from 1990 through the end of 2019. Our findings contribute to the largely dated and highly fragmented literature on the geopolitical drivers of the MIC (military-industrial complex) shares performance. We find that, in contrast to the established literature, defense budgets announcements have complex and dynamic statistically significant positive impacts on defense company stock performance through current period budget announcements, changes to the prior budget announcements and lagged budget announcements. We also find that a single party control over the House of Representatives and the Senate has no significant impact on abnormal returns, whereas solely having a Republican President in office acts as a significant catalyst for excess returns to MIC stocks when compared to the Democratic Party Presidencies. Consistent with potential for overshooting expectations by investors, direct conflict participation has a significantly positive impact on stock performance. This effect is almost fully moderated by the subsequent period negative reaction. Overall, our evidence suggests that defense companies perform better in those periods with greater likelihood of unexpected conflict-related news, greater geopolitical volatility, less informationally efficient markets, and the potential for conflict escalation. To the best of our knowledge, this is the first study of determinants of abnormal returns to MIC stocks that takes explicit account of the nature of U.S. participation in a military conflict (direct vs indirect), while controlling for an exhaustive range of complex budgetary and political factors and lags.

Keywords: U.S. defense stocks; Military conflicts; Stock prices; Foreign conflicts; Event study; GARCH; Volatility; Excess returns (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 H56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056022001836
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:82:y:2022:i:c:p:335-346

DOI: 10.1016/j.iref.2022.06.023

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().