Excessive profits of German defense contractors
Rendon, Rene G.
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Wang and San Miguel report that U.S. defense contractors earn excessive profits relative to their industry peers. This work provides the first evidence that this phenomenon is not restricted to the United States. By applying Wang and San Miguel’s innovative industry-year-size match, we found that German defense contractors earn economically significant, excessive profits. The comparison between German and U.S. defense contractors revealed similar patterns in both countries. The statistical evidence for excessive profitability is stronger for the measurements return on assets (ROA) and return on common shareholder’s equity (ROCE), while the findings for profit margin ratio (PMR) and operating margin ratio (OMR) are statistically less significant. The comparison of the regulatory environment of the United States and Germany showed that the contracting rules of both countries emphasize competition among defense contractors, but the perspectives on and uses of profit and fees differ for cost-based contracts. In the United States, profit and fees are used to share the risk of rising costs between defense contractors and the government. In the German system, profit for defense contracts is calculated by the Bonner Equation. This difference could be a reason for the more pronounced excessive profits in Germany.
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