Are Defense Contractors Rewarded for Risk, Innovation, and Influence?

This study investigates the factors that lead to a diversity of profitability among defense contractors, a topic largely ignored by prior studies. We use regression analysis to test whether the profitability of defense contractors is significantly associated with factors that are hypothesized to cause the diversity of profitability among defense contractors. We find that defense contractors assuming higher risks, being more innovation-oriented, and being more influential could earn higher profitability from their defense business than other defense contractors, but defense business in general seems to be less profitable than commercial business. Our evidence suggests that the profitability of defense contractors is reasonable with respect to rewarding risk and innovation. This study provides new light on the reasonableness of defense contractors’ profitability and also provides useful evidence to evaluate the effectiveness of the Department of Defense in implementing its stated profit policy