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Investor Reaction to Inter-corporate Business Contracting: Evidence and Explanation

Elayan, Fayez A. and Pukthuanthong, Kuntara and Roll, Richard (2006) Investor Reaction to Inter-corporate Business Contracting: Evidence and Explanation. Economic Notes, 35 (3). pp. 253-291. ISSN 0391-5026. doi:10.1111/j.1468-0300.2006.00166.x.

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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.

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Additional Information:© 2006 The Authors. Journal compilation © 2006 Banca Monte dei Paschi di Siena SpA. Published by Blackwell Publishing Ltd.
Issue or Number:3
Classification Code:JEL: D21; L24
Record Number:CaltechAUTHORS:20190502-143835293
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Official Citation:Elayan, F. A., Pukthuanthong, K. and Roll, R. (2006), Investor Reaction to Inter‐corporate Business Contracting: Evidence and Explanation. Economic Notes, 35: 253-291. doi:10.1111/j.1468-0300.2006.00166.x
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95191
Deposited By: Tony Diaz
Deposited On:03 May 2019 14:46
Last Modified:16 Nov 2021 17:10

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