Researcher ORCID Identifier

https://orcid.org/0009-0007-3448-0195

Graduation Year

2024

Date of Submission

4-2024

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Fan Yu

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2024 Viksit Verma

Abstract

This thesis examines the financial performance and market impact of defense and aerospace companies during periods of war and conflict. The study examines a sample of 9 firms representing the defense sector, and utilizes an event study methodology to assess stock returns during specific geopolitical events, namely the Russia-Ukraine War and the Israel-Hamas conflict. The study generally reveals positive abnormal returns during conflicts, indicating lower volatility and reduced market risk for the sample of defense firms compared to the broader market. All abnormal returns are statistically significant for the Russia-Ukraine War. For the Israel-Hamas conflict, abnormal returns for 4 out of 9 firms are statistically significant, likely due to its regional nature and smaller scale.

Past literature review attributes this effect to the predictable increase in government spending during war periods, which reduces earnings dispersion for future quarters. However, the impact varies with the geographic location of the conflict, and the scale and degree of direct involvement by the United States. Although the analysis aimed to correlate firm-specific characteristics like firm size, ex-military board membership, and government contract history with abnormal returns during these two events, results were not statistically significant. Nevertheless, the trend supports existing literature suggesting that increased defense spending can reduce stock volatility in this sector and generally yields positive abnormal returns.

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