The Diversification Effect of Defense Business on Risk and Return

Department or Administrative Unit

Accounting

Document Type

Article

Author Copyright

© 2020 Creighton University

Publication Date

Winter 2020

Journal

Quarterly Journal of Finance and Accounting

Abstract

This study investigates the effect of defense business as a distinctive way of diversification on a firm's accounting determined risk and accounting returns. It finds that firms with both defense and commercial business were less volatile in sales and accounting returns and earned accounting returns comparable to or higher than pure commercial firms for the period of 1980 to 2015. The evidence suggests that it is a viable strategic decision for management to diversify into defense business for optimizing risk-return performance. Additionally, diversifying into defense business was more effective for lowering a firm's risk and improving its accounting returns in the build-up period for defense demand (1980-1990) than in the deep cuts period (1991-1998). This study is among the first that attempts to connect two important streams of research - diversification effect and defense industry profitability - and sheds light on understanding the effect of political changes on firms diversifying into defense business.

Comments

This article was originally published in Quarterly Journal of Finance and Accounting.

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