Defense Procurement: Fraud, Penalties, and Contractor Influence

34 Pages Posted: 8 Dec 1998 Last revised: 21 Jun 2017

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

D. Scott Lee

University of Nevada, Las Vegas - Lee Business School

Valaria P. Vendrzyk

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems

Date Written: 1999

Abstract

Press reports of military procurement fraud investigations, indictments, and suspensions are associated with significantly negative average abnormal returns in the stocks of affected firms. Abnormal stock returns are significantly less negative, however, for firms ranking among the Top 100 defense contractors than for unranked contractors, even after controlling for firm size, the fraud's characteristics, and the firm's recidivism. Unranked contractors are penalized heavily for procurement frauds, experiencing both a decline in market value and a subsequent loss in government-derived revenues. Furthermore, these losses are related to the percentage of the firm's revenues that derive from government contracts. Influential contractors, in contrast, are penalized lightly, experiencing negligible changes in share value and government contract revenue.

JEL Classification: D21, G38, H57, K23, K42, L14

Suggested Citation

Karpoff, Jonathan M. and Lee, D. Scott and Vendrzyk, Valaria P., Defense Procurement: Fraud, Penalties, and Contractor Influence (1999). Journal of Political Economy, 107, August 1999, 809-842.. Available at SSRN: https://ssrn.com/abstract=141090

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

D. Scott Lee (Contact Author)

University of Nevada, Las Vegas - Lee Business School ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States
702-895-2526 (Phone)
702-895-4630 (Fax)

HOME PAGE: http://faculty.unlv.edu/slee

Valaria P. Vendrzyk

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States
540-231-2527 (Phone)
540-231-2511 (Fax)

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