Investor Reaction to Inter-Corporate Business Contracting: Evidence and Explanation

39 Pages Posted: 21 Mar 2007

See all articles by Fayez A. Elayan

Fayez A. Elayan

Brock University-Goodman School of Business

Richard Roll

California Institute of Technology

Kuntara Pukthuanthong

University of Missouri, Columbia

Abstract

We examine the stock market reaction to 1227 inter-corporate ordinary business contract announcements reported by Dow Jones between January 1, 1990 and December 31, 2001. Around contract announcement dates, we find statistically significant positive average abnormal returns and abnormal trading volume for contractors, but insignificant positive abnormal returns and negative abnormal volume for contractees. Cross-sectionally, contract announcement period returns are higher for contractors who are small relative to the contract size, have higher return volatility, larger market-to-book ratios and higher profitability. The announcement period returns of contract-awarding firms are not significant and are only marginally related to cross-sectional explanatory factors. The results are consistent with two explanatory stories: contractor quasi-rents induced by the winner's curse and information signalling about contractor production costs. The results are not consistent with perfect competition, with contracts having positive net present values for both parties, and with a version of incomplete contracting theory.

Suggested Citation

Elayan, Fayez A. and Roll, Richard W. and Pukthuanthong, Kuntara, Investor Reaction to Inter-Corporate Business Contracting: Evidence and Explanation. Economic Notes, Vol. 35, No. 3, pp. 253-291, November 2006, Available at SSRN: https://ssrn.com/abstract=975357 or http://dx.doi.org/10.1111/j.1468-0300.2006.00166.x

Fayez A. Elayan

Brock University-Goodman School of Business ( email )

1812 Sir Issac Brock Way
St. Catharines, Ontario L2S 3A1
Canada
905-688-5550 (Phone)
905-688-9779 (Fax)

HOME PAGE: http://www.brocku.ca

Richard W. Roll (Contact Author)

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
16
Abstract Views
538
PlumX Metrics