The Budgets of Wars: Analysis of the U.S. Defense Stocks in the Post-Cold War Era

18 Pages Posted: 27 May 2017 Last revised: 22 Jul 2019

See all articles by Constantin Gurdgiev

Constantin Gurdgiev

Trinity College, Dublin; Monfort College of Business, University of Northern Colorado

Robert Marra

Trinity College (Dublin) - Trinity Business School

Andrew Mulhair

Trinity College (Dublin)

Date Written: July 20, 2019


In this study, we analyzed the effects of the U.S military participation in direct and indirect foreign conflicts (direct and indirect), defense budget announcements, and various political factors have on the five largest U.S. defense companies share prices. We conducted this analysis by using a fixed effect panel approach along with event studies, using daily, monthly, and quarterly data from 1990 to the end of the first quarter of 2018. Our findings contribute to the substantial, albeit largely dated, literature on the geopolitical and political drivers for the MIC (military-industrial complex) stocks. We find that, in contrast to the established literature, defense budgets announcements have a statistically significant positive relationship with defense company stock performance on a quarterly basis, but no lagged effects, and no shorter term (monthly) effects. We also find that a single party control over the house of representatives and the senate has an insignificant impact on returns, whereas solely having a president in office was a significant catalyst for excess returns when the presidency was held by the Republican party. This is interesting given the commonly alleged Republican party’s emphasis on increasing defense spending and the general public perception of the relative hawkishness of the Republican administrations and legislators. Consistent with potential for overshooting expectations by investors, direct conflict had a significantly positive impact on stock performance when considered quarterly, and lagged direct conflict was statistically negative and of similar magnitude to the contemporaneous effect. We are the only study that looks at dynamic changes and lags in conflicts evolution in the literature to-date. Using monthly data, direct conflict had an insignificant relationship with stock prices, while the lagged effect was negative. With direct involvement, the market appears to be inefficient with information available regarding the nature and scale of the conflict. Indirect conflicts were found to be statistically not significant at the point of their announcement, but generated a significant and positive abnormal returns with a lag. This implies that defense companies perform better in these periods due to more instances of unexpected conflict-related news, greater geopolitical volatility, less efficient markets, and a growth aspect in the form of the potential for conflict escalation. However, our findings suggest that these effects are only present with a lag.

Keywords: U.S. defense stocks, conflicts, U.S. military engagements, stock prices, foreign conflicts

JEL Classification: G12, G14, G18, H56

Suggested Citation

Gurdgiev, Constantin and Marra, Robert and Mulhair, Andrew, The Budgets of Wars: Analysis of the U.S. Defense Stocks in the Post-Cold War Era (July 20, 2019). Available at SSRN: or

Constantin Gurdgiev (Contact Author)

Trinity College, Dublin ( email )

Trinity College
Dublin 2

Monfort College of Business, University of Northern Colorado

800 17th St Campus Box 128
Greeley, CO 80639
United States

Robert Marra

Trinity College (Dublin) - Trinity Business School

Aras an Phiarsaigh
College Green
Dublin, Leinster D2

Andrew Mulhair

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster D2

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