Defense Procurement Fraud, Penalties, and Contractor Influence

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Abstract
Press reports of investigations of fraud, indictments, and suspensions in military procurement 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 one controls 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.

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