Segment Level Study of Defense Industry Capital Investment

摘要

This thesis investigates the economic factors that are influential for inducing capital investment in the defense industry. The research focuses on the segment level of the firm in order to provide a more discriminating examination of defense industry behavior than would not be possible at the combined firm level. The firm segments chosen for the study are from companies that have remained among the largest 100 prime contractors between 1977 and 1984. A descriptive model is developed which includes a group of candidate variables that were chosen based on investment theory and previous empirical work. From the proposed model a set of variables is selected that best captures the variability of capital expenditures in the defense industry. The results of the regression analysis indicate that liquidity is the most important factor for determining the level of capital expenditures in the defense industry. The level of output, as measured by sales, is also an important factor. Liquidity is the internal sources of funds available from profits and depreciation. The close relationship between liquidity and capital expenditures suggests that increased emphasis on capital investment as part of the weighted guidelines profit policy is appropriate. An additional measure available to encourage defense industry capital investment is the establishment of a special depreciation allowance that would increase liquidity and lower the costs of capital investment for the defense industry. Keywords: Finance; Regression analysis.