The Effect of Government Contracts on Corporate Valuation
58 Pages Posted: 23 Mar 2020
Date Written: 2019
We document significantly lower valuations for government contractors in the United States. While contracting with government agencies reduces firms’ cost of equity, it significantly lowers their sales growth. These findings are contingent on economic conditions; negative valuations dissipate as operating performance improves during economy - and industry-wide recessions. The overall negative valuation effect of government contracts holds only for government contractors in strategically unimportant industries, as strategically important contractors have higher valuations, driven by better operating performance regardless of economic conditions. This is the first study examining the relationship between government procurement and corporate valuation. It also adds to the growing body of literature on politically connected firms by analyzing government contractors as a related‑but‑separate channel of governmental influence on the corporate world.
Keywords: Government Contractors, Cost of Equity, Firm Value, Operating Performance, Sales Growth, Tobin’s Q
JEL Classification: G30, G32, G38
Suggested Citation: Suggested Citation