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Title: Growth opportunities and investment policies in the U.S. defense industry
Authors: Goyal, Vidhan K.
Keywords: Capital structure
Debt policy
Payout policy
Growth opportunities
Issue Date: Apr-2002
Citation: Journal of financial economics, v. 64, iss. 1, April 2002, p. 35-59
Abstract: The U.S. defense industry provides a natural experiment for examining how changes in growth opportunities affect corporate financial policies -- growth opportunities increased substantially during the Reagan defense buildup of the early 1980s, but plummeted with the end of the cold war and associated defense budget cuts in the late 1980s and early 1990s. We examine a variety of corporate financial policies for a sample of 61 defense firms and a benchmark sample of 61 manufacturing firms during 1980-1995, a period spanning the changes in growth opportunities in the defense industry. Weapons manufacturers, the defense firms most affected by these changes, increase their leverage and distribution of cash to investors significantly as their growth opportunities decline and concurrently they cut their capital and R&D spending significantly. Merger and acquisition activity increases substantially during the low growth period as the industry consolidates and some defense contractors diversify into higher growth industries. Over the entire period, returns to acquiring defense firms are significantly positive when they acquire other defense firms and significantly negative when they acquire nondefense firms; the difference in bidder returns for the two types of acquisitions is most pronounced during the low growth period. Overall, the results complement other studies that have found cross-sectional relations between proxies for growth opportunities and corporate financial policies and validate the prominent role played by growth opportunities in the theory of corporate finance.
Rights: Journal of financial economics © copyright (2002) Elsevier. The Journal's web site is located at
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