Government Procurement and Firm Performance: The Role of Network Centrality

Abstract

The U.S. government, as the world’s biggest buyer, can substantially impact private suppliers. Although important, government contracting is an understudied topic. This research bridges the gap in current literature by investigating the impact of U.S. government contracting on the short- and long-term financial performance of private suppliers. Juxtaposing agency theory, property rights theory and analyzing panel data collected from the Federal Procurement Data System, Factset Revere and Compustat, this research investigates the interplay of government contracts, firm network centralities, and financial performance of 2,834 firm-year observations (627 firms). The empirical analysis suggests that government contracting bolsters suppliers’ short-term financial performance (ROA), but negatively affects the long-term financial performance (Tobin’s Q). In addition, network quality, measured as eigenvector centrality, ameliorates the negative effect of government contracts on long-term performance. On the contrary, network quantity, measured as degree centrality, demonstrates a negative moderating effect.