A Note on the Profits and Riskiness of Defense Contractors

In a 1971 article, Stigler and Friedland (hereafter S-F) argue that the category of firms labeled defense contractors had, depending on the sample time period observed, (1) unusually high or low profitability and (2) superior or approximately average stock market performance.' In addition, S-F state that defense contractors are more risky than the average firm since there is a positive correlation between the instability over time of the sales of a firm and its share of defense business.2 Capital market theory provides an alternative way of investigating the risk and return of defense contractors. The purpose of this note is to furnish empirical estimates of (1) stock market performance of the portfolio of S-F defense contractors based on the traditional and extended capital asset pricing models of Sharpe, Lintner, Mossin, and Black3 and (2) the relative market risk of the portfolio of S-F defense contractors. These findings are compared with those of S-F.