An examination of the information content of allegations of procurement fraud in the defense contracting industry

I examine the stock market reaction to defense contractor procurement fraud during the 1980s by investigating the following questions: (1) how does the stock market react to an initial, firm-specific indictment for procurement fraud; (2) how does the stock market react to subsequent events related to the resolution of procurement fraud cases; and (3) how does the stock market react to recurring indictments for procurement fraud?;The Dow Jones News Service is the source of the firm-specific announcements of defense contractor procurement fraud between 1983 and 1991. The search of the Dow Jones New Service yielded 319 announcements from 198 cases of procurement fraud within a sample of 83 defense contractors. I classified the announcements as investigations, indictments or subsequent events related to the resolution of procurement fraud cases. Subsequent events are Department of Defense actions punishing the contractor prior to the resolution of a procurement fraud case and formal resolution announcements.;Descriptive analyses include financial and industry information for each contractor and descriptive statistics for the sample. The descriptive analyses reveal that the sample exhibits a size bias and clusters by industry. I use the size-control portfolio abnormal return method to test the market price reaction to a defense contractor's first and second post-1983 indictments for procurement fraud, and subsequent events related to the resolution of procurement fraud cases.;The major results of the dissertation are (1) the stock market reaction to an initial, firm-specific indictment for procurement fraud is significantly negative and concentrates in a two-day event window--the day of and the day after the announcement appeared on the Dow Jones Newswire; (2) the stock market reaction to punitive action taken by the Department of Defense prior to the resolution of a procurement fraud case is significantly negative, but the stock market reaction to a formal resolution announcement is not significant; and (3) the stock market reaction to a second indictment for procurement fraud is significantly negative and is not significantly different from the stock market reaction to an initial indictment for procurement fraud.