A Quantitative Analysis of the Relationship Between DoD Contractors’ Financial Health and Their Merger and Acquisitions Spending Using Panel Data Regression

Abstract

This paper examines the relationship between a prime contractor’s financial health and its mergers and acquisitions (M&A) spending in the defense industry. It aims to identify financial characteristics of prime contractors that are associated with M&A spending which can provide the Department of Defense (DoD) indications of future M&A activity. These indications can help decision makers better understand the competitiveness of the defense market and develop policies that benefit the overall health of the defense industrial base. The study uses panel data regression models on 40 companies between 1985 and 2021. The company’s financial health is assessed using common financial ratios while controlling for key economic factors. The results show a significant relationship between efficiency and M&A spending, indicating that companies with lower efficiency tend to spend more on M&As. However, there was no significant relationship between M&A spending and a company’s profitability or solvency. These results were consistent with previous research. However, the effect of liquidity was the opposite of the expected result, possibly due to the defense industry’s different view on liquidity compared to previous research.