The financial performance of aircraft manufacturers during world war II: the vicissitudes of war

Abstract

Controversy has long surrounded the role and profitability of US defense contractors. From a financial perspective the question becomes whether defense contractors earn greater profits and investor returns than other companies during military conflicts. We explore this question by examining the accounting profitability and investor returns of US aircraft manufacturers before, during, and after World War II and compare them to a sample of non-defense firms. We also examine the reactions of aircraft stock prices to important political and military events of the time. We find that (1) aircraft stocks exhibited positive abnormal returns around events associated with defense buildups and outbreaks of hostile action and negative returns around events signaling an end to hostilities, (2) the company’s accounting returns improved during the war but these higher accounting returns did not translate into higher stock returns for the shareholders, and (3) investors could have earned higher stock returns had they switched out of aircraft stocks after Pearl Harbor and reinvested the proceeds in the overall market.

Keywords:

• World War II
• Aircraft industry
• Defense contracting
• Wartime stock returns

JEL Codes:

• G10
• N42
• N22

Notes

¹ The numbers cited come from Economic Concentration and World War II, Report of the Smaller War Plants Corporation to the Special Committee to Study Problems of American Small Business, US Senate 1946, 30–31, 157.

² Vander Meulen (1991) reports that the military paid Martin only $80,000 for a prototype that cost $112,000 to build and Consolidated only $75,000 for a prototype that cost $225,000 (p.136). Also, Curtis had lost $378,000 on $10.3 million in Army business from 1928 through 1933 (p. 138).

³ ‘Hitler’s Angry Speech,’ Manchester Guardian, 13 September 1938. Sub headlines to the main headline are ‘Self-determination the right of the Students’ and ‘German aid, if need be.’

⁴ Often misquoted as ‘Peace in our time.’

⁵ Holley (1964) describes this on pages 172 and 173 of ‘Buying Aircraft,’ another volume of the US Army’s official history of World War II. He notes that Roosevelt’s intimate associates had been discussing this prior to October 14 and that leaks continued through November and December of 1938.

⁶ Donald Nelson, head of the WW II War Production Board, notes in his memoir history about the collapse of France that ‘Although some of my new associates in Washington refused to “write off” Europe, I believe it was the conviction of a majority of American military men and business leaders that I should be smart to consider the war over.’ (Nelson 1946, 66).

⁷ The operation was dramatized in the famous 1977 movie, ‘A Bridge Too Far.’

⁸ The sequence of events for 16 July through 17 July was obtained in an email from Alex Wellerstein, Ph.D., a historian at the American Institute of Physics, who runs the blog ‘Restricted Data: Nuclear Secrecy’ (http://blog.nuclearsecrecy.com/about-me/).