Defense Industry Valuations:Fundamentals or Geopolitical Risk? : A Quantitative Panel Analysis of Relative Stock Performance

Sammanfattning

This study examines to what extent it is possible to explain how firm-specific, macroeconomic, and geopolitical factors contribute to relative stock-market performance in the defense sector. Using panel data for 27 defense companies over a ten-year period, multiple linear regression models are estimated to compare the explanatory power of different groups of variables. In particular, the analysis distinguishes between firm specific fundamentals and broader external factors that are meant to represent global uncertainty, including macroeconomic indicators and measures of geopolitical risk. The results indicate that macroeconomic and geopolitical variables generally provide greater explanatory power than firm-specific fundamentals. This indicates that the stock-performance is influenced to a significant extent by external conditions rather than solely by company-level characteristics. However, the overall explanatory power for all models is limited, with the full model explaining around 11% of the variance in the data. This explanatory power then drops of significantly for the fundamental model, only explaining around 2% of total variance. This suggests that stock performance in the defense sector is more complex than what can be represented by a linear regression model. Overall, the findings highlight the importance of considering external factors when analyzing defense stocks. The study contributes to the understanding of how different types of variables affect stock performance and provides suggestions for how this analysis could be developed for further research.