The Diversification Effect of Defense Business on Risk and Return
Department or Administrative Unit
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.
Zhong, K., Cao, Y., & Liao, K. (2020). The Diversification Effect of Defense Business on Risk and Return. Quarterly Journal of Finance and Accounting, 58(1/2), 33-66.
Quarterly Journal of Finance and Accounting
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