واکنش بازار به تاخیر قرارداد DOD - آیا پاداش بازار عملکرد ضعیفی دارد؟
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|27059||2008||13 صفحه PDF||سفارش دهید||محاسبه نشده|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Review of Financial Economics, Volume 17, Issue 1, 2008, Pages 33–45
Civilian development projects occur faster than projects for the Department of Defense (DoD). Faster development either means quicker delivery (i.e. sales), or for DoD, it means a more capable warfighter. On average, DoD Acquisition Category One (ACAT I) development projects now take 15 years, an increase of 20%. These same companies producing civilian products faster fail to do so with their DoD contracts. This paper examines the relationship between DoD delay and its impact on shareholder wealth. The results show positive, significant wealth for shareholders at the announcement of a DoD delay, suggesting an insensitivity toward such production delays.
Over the past 40 years, there has been a steady increase in the time it takes an acquisition program to produce a weapon system for the warfighter. McNutt (1998) described the magnitude of this problem by considering the history of acquisition cycle time of Acquisition Category I (ACAT I)1 programs. In 1965, the average ACAT I program took 60 months; by 1994, the average ACAT I program had extended to over 108 months (McNutt, 1998). In 1986, the Packard Commission warned that unreasonably long acquisition cycle times (e.g. 10 to 15 years) will have a negative impact on national security. Notwithstanding the Packard Commission's warning, a 1993 RAND study found that the trend of growth in acquisition cycle time had not diminished (Drezner, Jarvaise, Hess, Hough, & Norton, 1993). The most up-to-date reviews of large weapon system acquisitions are accomplished annually by the Government Accountability Office (Government Accountability Office, 2003, Government Accountability Office, 2004 and Government Accountability Office, 2005). The GAO defines acquisition cycle time from the point of approval to initial operating capability (IOC). Delay is defined as an extension to the originally predicted cycle time. For standardization, these definitions have been adopted for this research. In 2005, the GAO found that over the last 3 years, programs had increased their cycle time from 147 to 175 months, a 19% increase. Table 1 summarizes the cost and schedule growth of programs reviewed by GAO in their 2005 report. Fig. 1 shows that McNutt's predicted growth in cycle times for 2000–2004 falls well short of the actual GAO data reported in 2005, a worrisome trend.Somewhat ironically, the companies identified as having the largest cycle time growth (delay) on DoD contracts have also been lauded for their ability to develop and deliver products to their commercial customers faster, better and cheaper. Boeing, Pratt and Whitney (P and W) and Northrop Grumman have all been cited as industry examples for cycle time improvement. These same companies' performances on DoD contracts executed concurrently to their noteworthy commercial efforts, however, have not been as outstanding. For example, Boeing designed and built the 777 in 6 years, yet it took nearly 20 years to build the C-17 (Battershell, 1999). P and W's commercial engine division reduced cost by 35% and production time from eighteen to six months for airline industry customers (Womack & Jones, 1996). In fact, P and W designed, built and entered full rate production of the GP7200 engine for the A380 Airbus in less than 5 years (Pratt & Whitney, 2005). Contrast this with the engines for the F-22, which took P and W more than 12 years to develop at the exact same facility (Global Security.ORG and Aero propulsion testing, 1998), and the problem becomes apparent. We are not convinced that the development differences can be attributed solely to more exacting, or even more technically difficult, specifications. Knowing that profit maximization is a company's number one goal, and considering that contract delays appear to be at odds with achieving this goal, we consider the question, “Are announced contract delays perceived as wealth-increasing for shareholders?” Using event study methodology, we investigate one possible explanation by examining the relationship between announced DoD contractual delay and the stock price of the affected company. Paul Kaminski, former Undersecretary of Defense for Acquisition and Technology, summed up the issue in 1995 when he addressed the Senate: “The Department of Defense cannot afford a 15-year acquisition cycle time when the comparable commercial turnover is every 3 to 4 years. The issue is not only cost. The lives of our soldiers, sailors, marines, and airmen may depend upon shortened acquisition cycle times as well. In a global market, everyone, including our potential adversaries, will gain increasing access to the same commercial technology base. The military advantage goes to the nation who has the best cycle time.” If shareholders perceive delays to be wealth-increasing, then any impetus to correct incentive contract inconsistencies must begin with the DoD. So, by examining the corresponding market reaction to an announced contract delay, we expect to identify systemic motivators that may contribute to extended cycle times on DoD contracts. The remainder of this paper is organized as follows. The Section 2 outlines the previous literature and the model, the Section 3 includes the methodology and empirical results, while Section 4 concludes.
نتیجه گیری انگلیسی
DoD announced contract delays created significant wealth for both Boeing and United Technology shareholders. Though the results of this research are encouraging, there does exist some caveats. This research was conducted for two companies with one announced delay, so we are not ready to indict the entire DoD acquisitions process just yet. This research provides some indication that an issue exists, but to understand the ramifications of this issue, it must be studied further. If future research finds this not to be anomalous, but truly the status quo such that shareholders infer wealth creation when DoD announces contract delays, this may well warrant changes to the acquisition process. The early five-day delayed reaction is marginally troubling. While we attribute this reaction to the size and complexity of the contract, especially given the entangling issues of two joint prime contractors, it is entirely possible this is an indication that the cumulative abnormal returns are not associated with the contract delay announcement. We believe this to be unlikely, given the strong statistical significance associated with each of the daily abnormal returns after those 5 days. So, we are comfortable with the explanation that investors needed to “digest” the news. To truly understand the system as a whole, understanding the value that delay has for DoD is crucial, this study should be replicated on a larger scale to draw broad-based conclusions about the overall DoD acquisition process. Performing this same study on the list of 26 programs in the GAO Selected Weapons System Review would provide a more definitive assessment of the problem. Once the issue is confirmed definitively, we find the subject of contracts and incentive compatible contracting vehicles to remain rich in possible research topics. The value of the delay to the DoD must be understood before policy recommendations can be made with full understanding of their impact.