A market reaction to DOD contract delay — Does the market reward poor performance?

• Author: Robert Carden,Sonia E. Leach,Jeffrey S. Smith
• Published date: 20 February 2007
• Date: 20 February 2007
• DOI: http://doi.org/10.1016/j.rfe.2007.02.004

A market reaction to DOD contract delay —Does the market

reward poor performance?

☆

Robert Carden, Sonia E. Leach, Jeffrey S. Smith ⁎

Department of Systems Engineering and Management, Air Force Institute of Technology, United States

Received 15 May 2006; accepted 1 February 2007

Available online 20 February 2007

Abstract

Civilian development projects occur faster than projects for the Department of Defense (DoD). Faster

development either means quicker delivery (i.e. sales), or for DoD, it means a more capable warfighter. On

average, DoD Acquisition Category One (ACAT I) development projects now take 15 years, an increase of 20%.

These same companies producing civilian products faster fail to do so with their DoD contracts. This paper

examines the relationship between DoD delay and its impact on shareholder wealth. The results show positive,

significant wealth for shareholders at the announcement of a DoD delay, suggesting an insensitivity toward such

production delays.

© 2007 Published by Elsevier Inc.

JEL classification: G14; H57; L21

Keywords: Acquisition; DoD; Lean; Event study

1. Introduction

Over the past 40 years, there has been a steady increase in the time it takes an acquisition program to

produce a weapon system for the warfighter. McNutt (1998) described the magnitude of this problem by

Review of Financial Economics 17 (2008) 33–45

www.elsevier.com/locate/econbase

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The views expressed in this paper are those of the author and do not reflect the official policy or position of the United States

Air Force, Department of Defense, or the United States Government.

⁎Corresponding author. Air Force Institute of Technology, Bldg. 640, Room 103b, 2950 Hobson Way, Wright-Patterson AFB

OH 45433, United States. Tel.: +1 937 255 3636x7393; fax: +1 937 656 4699.

E-mail address: jeffrey.smith@afit.edu (J.S. Smith).

1058-3300/$ - see front matter © 2007 Published by Elsevier Inc.

doi:10.1016/j.rfe.2007.02.004