Please use this identifier to cite or link to this item:

Growth opportunities and investment policies in the U.S. defense industry

Authors Goyal, Vidhan K.
Issue Date 2002-04
Source Journal of financial economics, v. 64, (1), 2002, April , p. 35-59
Summary 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
Language English
Format Article
Access Find@HKUST
Files in this item:
File Description Size Format
grow.pdf pre-published version 3487772 B Adobe PDF