Wall Street and the Pentagon: Defense Industry Access to Capital Markets, 1990-2010. An Annotated Brief

Abstract

Abstract : Defense firms rely in part on cash raised from capital markets to finance ongoing operations as well as new investments in long-term assets, independent research and development, and retirement of maturing debt. The ability to access capital markets shapes the depth and breadth of the U.S. defense industry, the capabilities it can offer, and the cost of these capabilities to the Department of Defense. Given the monolithic nature of the defense market, it is paramount that decisionmakers understand the relationship between defense spending and the financial metrics that drive access to--and cost of--capital for defense firms. This paper presents the data and findings of research conducted by the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies (CSIS) on defense companies' access to capital markets during the period 1990-2010. The analysis shows that for the universe of defense equities analyzed, there exists a positive relationship between defense spending, companies' financial health, and the industry's relative market valuation. However, no evidence was found to suggest that these firms encountered difficulties accessing capital markets either during a period of market contraction (1990-2001) or during the recent budget buildup (2002-2010).