A reexamination of the relative profitability of the U.S. defense industry: 1968–1977

Abstract

Defense contracting profitability studies provide some insight into how well the constantly changing set of institutional substitutes for competitive markets worked in a particular time period. In this study, three measures of profitability are examined: market returns earned by common stockholders; overall corporate accounting returns that may more generally be the focus of congressional, journalistic, and public attention than market returns; and current compensation of corporate top management. We found that neither market nor accounting returns indicate the presence of excess profits from 1968 through 1977. Defense contractors' top management obtained significantly higher rates of increase in their current compensation from 1968 through 1977 than their counterparts in commercially-oriented firms. As a result, by 1977, top managers of defense-oriented firms received current compensation that was significantly higher than top managers of commercially-oriented firms. Different interpretations of this finding are presented. A significant association between market returns and both levels and rates of change of current compensation of top management was found for defense-oriented firms but not for commercially-oriented firms.