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The effect of government contracts on corporate valuation

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  • Esqueda, Omar A.
  • Ngo, Thanh
  • Susnjara, Jurica

Abstract

We document significantly lower valuations for government contractors in the United States. While contracting with government agencies reduces firms’ cost of equity, it significantly lowers their sales growth. These findings are contingent on economic conditions; negative valuations dissipate as operating performance improves during economy- and industry-wide recessions. The overall negative valuation effect of government contracts holds only for government contractors in strategically unimportant industries, as strategically important contractors have higher valuations, driven by better operating performance regardless of economic conditions. This is the first study examining the relationship between government procurement and corporate valuation. It also adds to the growing body of literature on politically connected firms by analyzing government contractors as a related‑but‑separate channel of governmental influence on the corporate world.

Suggested Citation

  • Esqueda, Omar A. & Ngo, Thanh & Susnjara, Jurica, 2019. "The effect of government contracts on corporate valuation," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 305-322.
    • Handle: RePEc:eee:jbfina:v:106:y:2019:i:c:p:305-322
    DOI: 10.1016/j.jbankfin.2019.07.003
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    Cited by:

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    2. Glegg, Charmaine & Harris, Oneil & Ngo, Thanh & Susnjara, Jurica, 2021. "Having the government as a client: Does this reduce earnings management of the firm?," Journal of Government and Economics, Elsevier, vol. 4(C).
    3. Nnadi, Modestus I. & Sorwar, Ghulam & Eskandari, Rasol & Chizema, Amon, 2021. "Political connections and seasoned equity offerings," Journal of Banking & Finance, Elsevier, vol. 133(C).
    4. Shaddy Douidar & Christos Pantzalis & Jung Chul Park, 2023. "Political geography and the value relevance of real options," The Financial Review, Eastern Finance Association, vol. 58(4), pages 703-733, November.
    5. Huang, Jun & Han, Feifei & Li, Yun, 2023. "Government as major customer: The effects of government procurement on corporate environmental, social, and governance performance," Finance Research Letters, Elsevier, vol. 54(C).
    6. Duong Phuong Thao Pham & Thi Cam Ha Huynh, 2020. "The Impact of Trade Credit Investment on Manufacturing Firms' Profitability: Evidence from Vietnam," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 68(4), pages 775-796.

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    More about this item

    Keywords

    Government contractors; Cost of equity; Firm value; Operating performance; Sales growth; Tobin's Q;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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