Fayez A. Elayan Kuntara Pukthuanthong Richard Roll
Abstract
We examine the stock market reaction to 1227 inter-corporate ordinary business contract announcements reported by Dow Jones between January 1, 1990 and December 31, 2001. Around contract announcement dates, we find statistically significant positive average abnormal returns and abnormal trading volume for contractors, but insignificant positive abnormal returns and negative abnormal volume for contractees. Cross-sectionally, contract announcement period returns are higher for contractors who are small relative to the contract size, have higher return volatility, larger market-to-book ratios and higher profitability. The announcement period returns of contract-awarding firms are not significant and are only marginally related to cross-sectional explanatory factors. The results are consistent with two explanatory stories: contractor quasi-rents induced by the winner's curse and information signalling about contractor production costs. The results are not consistent with perfect competition, with contracts having positive net present values for both parties, and with a version of incomplete contracting theory. Copyright 2006 The Authors Journal compilation 2006 Banca Monte dei Paschi di Siena SpA
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Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.
Volume (Year): 35 (2006) Issue (Month): 3 (November) Pages: 253-291 Download reference. The following formats are available: HTML
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