Abstract
Boeing Corp. (NYSE:BA) was selected on the 27th of September, 2018 by the AirForce to build the U.S. Air Force’s next training jet in a contract worth up to USD 9.2 billion over the life of the program. Through TenderAlpha’s IDV feed, subscribers received the contract by the morning of the 28th of September.
Boeing shares edged higher after the news, to close up 0.6% at USD 367.38, while shares of Korea Aerospace (a competitor for the contract) fell more than 24% in Seoul.
This study presents overreaction in the financial market and аims to prove that IDV/Framework events announcements affect the movement of stock prices that may be a part of the same process.
Introduction
The role of government procurement in the global economy is often underestimated, especially with respect to the participation of publicly listed companies as leading contractors in the process.
TenderAlpha.com (a product by Bizportal) is a global government contracts database product consisting of aggregated government procurement contract awards and related company information from more than 50 countries worldwide with 10+ years of historical records and various ongoing delivery options. Contract awards information is scraped from different government sources and then aggregated in one single format. In addition to contract awards, TenderAlpha also monitors daily contract announcements and provides daily alerts of different government opportunities.
Discussion
Stock prices react continuously to a stream of news about companies and external economic conditions. In the case of high-level government budgetary announcements and/or long-term contracts such as framework agreements (EU) and IDVs (US) the market is expected to react with a higher level of intensity to such phenomena especially having in mind the larger value and lack of coverage in mainstream media.
In the US case - IDV events serve as the parent of one or a number of contracts. There are also IDVs that actually never develop into actual contract awards but could still represent government intention for significant purchases and therefore turn into a stock price signal.
Many analysts use the information reliability theorem to explain and predict stock price reactions around profit warnings.
Analysts also find that proxies for information reliability can predict the return pattern subsequent to a profit warning to some extent. Due to the similarity between profit warnings and earnings announcement surprises, their findings are in line with the research on the post-earnings-announcement drift.
Methodology
In the context of the data collected and aggregated by TenderAlpha – the immediate effect of long-term budget allocation events and framework contracting announcements should be analyzed as sales surprise type of events and/or major positive news about future earnings. Any IDV/framework contract award made directly to a public listed company or a subsidiary of such is news that could be monitored on daily basis and on a global level exclusively through TenderAlpha. Bizportal's research and available literature on the subject suggest that the effect of IDV/framework contract announcement could be even larger than the regular contract award announcement.
The main indicator of focus in the research process is the beta coefficient of the individual stock and the stock market as a whole. This approach allows for analyzing the post-announcement stock price drift effect in the 3 days after the event.
The effect of the announcement could vary depending on:
1) award amount;
2) level of material value as compared to the company’s size;
3) concentration level of awards (exposure to procurement as a % capture rate of company’s revenue;
4) type of contract.
Results
The post-announcement drift went on for a few days as Boeing’s share price reached USD 394.28 on the 3rd of October, 2018. Which is a 6.8% increase for the 5 days between the announcement and the highest point on the 3rd of October. The Dow Jones increased by only 2% for the same period. At the same time, Boeing had an average monthly beta of 1.35, which would predict a return of 2.7% for the period. We observe an abnormal return in the post IDV contract announcement days that has resulted in a significant gain in the stock price of Boeing.
Additionally, the price trend in the aforementioned 3-day interval is strongly positive:
- USD 368.97 on 27th of September, 2018;
- USD 374.22 on 28th of September 2018;
- USD 394.28 on the 3rd of October, 2018.
Bizportal.co data focus emphasizes not on the immediate market return opportunity, but rather on the concept of post-announcement news effect.
Conclusions
- Real-life case scenarios prove the relation between public contracts and share prices
- Award-related announcements’ influence lasts extensively throughout the next several trading sessions instead of affecting the market only momentarily
- TenderAlpha contract award announcements give the investors an opportunity to behave when pricing stocks overreact to market information