Corporate Value Creation and the Award of Procurement Contracts

ABSTRACT This study explores how federal procurement contracts influence shareholder value, revealing a consistent positive correlation between the size of the initial award and investor reactions. We uncover a significant impact of the contract's Sweetheart Index on investor responses, with no‐bid (sole source) contracts, defense contracts, service contracts, and contracts exempt from cost or price reporting requirements attracting stronger investor interest. Notably, we observe significant information leakage around award announcements that affects investor behavior. Through difference‐in‐difference analysis, our findings show that long‐term defense contracts lead to a greater increase in return on equity compared to other large government contracts, as assessed against a matched sample of firms. Additionally, our study highlights that contracts in industries with high concentration and those involving unique goods and services tend to be more lucrative, providing critical insights for investors and policymakers engaged in federal procurement strategies.