IDEAS home Printed from https://ideas.repec.org/a/oup/rasset/v13y2023i1p146-180..html
   My bibliography  Save this article

Asset Pricing Implications of Firms’ Government Sales Dependency

Author

Listed:
  • Bharat Raj Parajuli
  • Jeffrey Pontiff

Abstract

This paper investigates the firm-level, asset pricing implications of government expenditures. Higher government sales dependency (GD), unconditional on political partisanship cycles, significantly predicts positive future returns, and a GD-weighted portfolio substantially improves the tangency portfolio’s ex post Sharpe ratio. Conditionally, the results are stronger during Republican presidencies. Higher returns do not stem from political connections or political and regulatory risks. The underlying economic channel is higher expected cash flow from increased profitability. Atypical provisions of government contracts and information asymmetry likely drive higher profit margins. A risk versus a mispricing analysis elicits more convincing evidence for mispricing as an explanation for abnormal returns. (JEL G18, G38, H50, H57, H72)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Bharat Raj Parajuli & Jeffrey Pontiff, 2023. "Asset Pricing Implications of Firms’ Government Sales Dependency," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 13(1), pages 146-180.
    • Handle: RePEc:oup:rasset:v:13:y:2023:i:1:p:146-180.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rapstu/raac011
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rasset:v:13:y:2023:i:1:p:146-180.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/raps .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.