War And Peace: The Reaction Of Defense Stocks

Abstract

In this paper we examine the response of a portfolio of defense contractors to war- and peace-related events. An event-study methodology is employed, and GARCH estimates of abnormal returns suggest that on balance the defense portfolio responds positively to war-related announcements and negatively to peace-related announcements. A cross-sectional analysis of the abnormal returns to firms in the Gulf War indicates that larger abnormal returns are associated with R&D intensive firms in concentrated industries, while lower abnormal returns are associated with firms that commit to above-average levels of capital expenditures.