Eastern Economic Journal

, Volume 44, Issue 2, pp 211–241 | Cite as

The Fortunes of War and Aircraft Manufacturer Stock Returns: The Case of the Korean War

Article
  • 41 Downloads

Abstract

We examine the profitability of U.S. aircraft manufacturers, their stock returns over the sample period, and their stock reaction to important events during the Korean War. Aircraft stocks responded favorably to events implying a continuation of the war and negatively to events implying a cessation of hostilities. Furthermore, their accounting profits improved substantially relative to pre-war years and to the median of the largest 500 U.S. corporations. This increase may explain why annualized returns for aircraft firms were greater than the overall market during the war. However, these higher returns were not “excessive” based on the Carhart four-factor alpha.

Keywords

Korean war aircraft industry defense contracting wartime stock returns 

JEL

G10 N42 N22 

Notes

Acknowledgments

The authors thank the anonymous referees and seminar participants at the Eastern Economic Association annual conference and the Northeast Business and Economics Association annual conference for their helpful comments. Stephen Ciccone gratefully acknowledges support from the Peter T. Paul Financial Policy Center.

References

  1. Agapos, A.M., and Lowell E. Gallaway. 1970. Defense Profits and the Renegotiation Board in the Aerospace Industry. Journal of Political Economy, 78: 1093–1105.CrossRefGoogle Scholar
  2. Bicksler, James, and Patrick J. Hess. 1976. A Note on the Profits and Riskiness of Defense Contractors. The Journal of Business, 49: 555–557.CrossRefGoogle Scholar
  3. Bohi, Douglas R. 1973. Profit Performance in the Defense Industry. Journal of Political Economy, 81: 721–728.CrossRefGoogle Scholar
  4. Bos, Ann M., and Randy R. Talbot. 2001. Enough and On Time: The Story of the Detroit Arsenal. Michigan History Magazine, (March 7): 25–47.Google Scholar
  5. Brandes, Stuart D. 1997. Warhogs: A History of War Profits in America. Lexington: University Press of Kentucky.Google Scholar
  6. Brown, William O., and Richard C.K. Burdekin. 2000. Turning Points in the U.S. Civil War: A British Perspective. The Journal of Economic History, 60: 216–231.CrossRefGoogle Scholar
  7. Carhart, Mark, M. 1997. On Persistence in Mutual Fund Performance. Journal of Finance, 52: 57–82.CrossRefGoogle Scholar
  8. Ciccone, Stephen, and Fred R. Kaen. 2014. The Financial Performance of Aircraft Manufacturers During World War II: The Vicissitudes of War. Defence and Peace Economics, 27: 743–773.CrossRefGoogle Scholar
  9. Fama, Eugene F., Lawrence Fisher, Michael C. Jensen, and Richard Roll. 1969. The Adjustment of Stock Prices to New Information. International Economic Review, 10: 1–21.CrossRefGoogle Scholar
  10. Dwyer, Larry. 1999. North American F-86 Sabre. Aviation History Online Museum, http://www.aviation-history.com/north-american/f86.html.
  11. Fama, Eugene, F., and Kenneth R. French. 1993. Common Risk Factors in the Returns on Stock and Bonds. Journal of Financial Economics, 33: 3–56.CrossRefGoogle Scholar
  12. Ferguson, Niall. 2008. Earning from History? Financial Markets and the Approach of World Wars. Brookings Papers on Economic Activity, 39: 431–477.CrossRefGoogle Scholar
  13. Fesler, James W. 1947. Industrial Mobilization for War: History of the War Productions Board and Predecessor Agencies, 19401945. Volume 1: Program and Administration. Washington, D.C.: Bureau of Demobilization, Civilian Production Administration.Google Scholar
  14. Finletter Commission. 1948. Survival in the Air Age. A Report by the President’s Air Policy Commission.Google Scholar
  15. Fisher, Franklin M., and John J. McGowan. 1983. On the Misuse of Accounting Rates of Return to Infer Monopoly Profits. American Economic Review, 73: 82–97.Google Scholar
  16. Frey, Bruno S., and Marcel Kucher. 2000. World War II as Reflected on Capital Markets. Economic Letters, 69: 187–191.CrossRefGoogle Scholar
  17. Hermes, Walter G. 1992. Truce Tent and Fighting Front. Washington, D.C.: Center of Military History, United States Army.Google Scholar
  18. Huebner, Solomon S. 1916. The American Security Market During the War. Annals of the American Academy of Political and Social Science, 68: 93–107.CrossRefGoogle Scholar
  19. Kaen, Fred R. 2011. World War II Prime Defense Contractors: Were They Favoured?. Business History, 53: 1044–1073.CrossRefGoogle Scholar
  20. Kofsky, Frank. 1993. Harry Truman and the War Scare of 1948. New York: St. Martin’s Press.Google Scholar
  21. Lombardi, Michael. 2008. Seventh Heaven: 50 Years Ago Boeing and Pan Am Revolutionized Travel with the 707. Boeing Frontiers, 8–9.Google Scholar
  22. Mayer-Sommer, Alan P., and James P. Bedingfield. 1989. A Reexamination of the Relative Profitability of the U.S. Defense Industry: 1968–1977. Journal of Accounting and Public Policy, 8: 83–119.CrossRefGoogle Scholar
  23. Miller, Karen. 1996. “Air Power is Peace Power” The Aircraft Industry’s Campaign for Public and Political Support, 1943–1949. The Business History Review, 70: 297–327.CrossRefGoogle Scholar
  24. Mrozek, Donald J. 1974. The Truman Administration and the Enlistment of the Aviation Industry in Postwar Defense. The Business History Review, 48: 73–94.CrossRefGoogle Scholar
  25. Nelson, Jeff. 2014. That Special Time: The U.S. Auto Industry During the Korean War. Curbside Classic, www.curbsideclassic.com/automotive-histories/cc-history-“that-special-time”-the-u-s-auto-industry-during-the-korean-war/.
  26. Schnabel, James F. 1992. United States Army in the Korean War: Policy and Direction: The First Year. Washington, D.C.: Center of Military History, United States Army.CrossRefGoogle Scholar
  27. Schwert, G. William. 1981. Using Financial Data to Measure Effects of Regulation. Journal of Law & Economics, 24: 121–158.CrossRefGoogle Scholar
  28. Simonson, Gene R. 1960. The Demand for Aircraft and the Aircraft Industry, 1907–1958. The Journal of Economic History, 20: 361–382.CrossRefGoogle Scholar
  29. Stigler, George J., and Claire Friedland. 1971. Profits of Defense Contractors. American Economic Review, 61: 692–694.Google Scholar
  30. Trevino, Ruben, and Robert Higgs. 1992. Profits of U.S. Defense Contractors. Defence and Peace Economics, 3: 211–218.CrossRefGoogle Scholar
  31. United States Gazette. 1 October 1814.Google Scholar
  32. United States Senate. 1946. Economic Concentration and World War II. Report of the Smaller War Plants Corporation to Special Committee to Study Problems of American Small Business. 79th Congress, 2nd Session.Google Scholar
  33. Wang, Chong, and Joseph San Miguel. 2012. The Excessive Profits of Defense Contractors: Evidence and Determinants. Journal of Public Procurement, 12: 386–406.Google Scholar
  34. Weidenbaum, Murray L. 1968. Arms and the American Economy: A Domestic Convergence Hypothesis. American Economic Review, 58: 428–437.Google Scholar
  35. Willard, Kristen L., Timothy W. Guinnane and Harvey S. Rosen. 1996. Turning Points in the Civil War: Views from the Greenback Market. American Economic Review, 86: 1001–1018.Google Scholar

Copyright information

© EEA 2016

Authors and Affiliations

  1. 1.Accounting and Finance Department, Paul College of Business and EconomicsUniversity of New HampshireDurhamUSA

Personalised recommendations