The Valuation Effect and Determinants of Corporate Contracting

We examine the stock market reaction to inter-corporate (984 contractors and 575 contractees) and corporate-government (1963 contractors) contract announcements reported by Dow Jones between January 1, 1990 and December 31, 2000. Around contract announcement dates, we find statistically significant positive average abnormal return for contractors, but insignificant average abnormal returns for contractees. Cross-sectionally, contract announcement period returns are higher for contractors who win larger and longer-term contracts, are relatively small, previously had slower growth but higher profitability, have many competitors, and are in riskier lines of business. Contract awarding firms have higher announcement period returns when their grants are relatively short term and when they previously had higher growth and lower profitability. The results for contract-winning firms are consistent with two explanatory stories: winning a contract reveals that the firm is a low cost producer and might also earn quasi-rents induced by the winner’s curse influence on contract bids.