America’s defense-industrial base has real problems. Production capacity is inadequate in critical areas, competition has declined, and supply chains remain vulnerable. Important weapons systems arrive late and over budget: the Government Accountability Office’s 2026 assessment found persistent schedule delays across major programs and an average delivery time exceeding 12 years. Contractors and government officials share blame for these failures.
But not all solutions to the problem are equal. Section 815 of the Senate’s version of the 2027 National Defense Authorization Act tries to solve the problem by barring the Pentagon from contracting with a company unless the contractor agrees not to repurchase its publicly traded shares or other capital distributions, including dividends.
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The proposal has bipartisan support and an intelligible premise: money returned to shareholders is money that could instead expand production. But the idea rests on a faulty assumption: that the cash a contractor can’t distribute in the form of stock buybacks or dividends will become productive defense investment. Neither standard corporate-finance theory nor evidence supports that assumption. Congress should, therefore, look elsewhere for fixes to our defense-industrial base.
In standard theory, companies ordinarily decide which projects are worth undertaking first, then how much liquidity they need, and only afterward what to do with any remaining cash. When a firm lacks additional projects expected to earn more than their cost of capital, it may distribute the excess to investors, who can redeploy the funds elsewhere. A dollar retained by a corporation is therefore not necessarily a dollar invested productively. It may remain as cash, pay down debt, finance an acquisition, increase compensation, or perhaps worst of all, support a project whose expected return does not justify its cost.
The leading empirical studies generally support this account. Alon Brav, John Graham, Campbell Harvey, and Roni Michaely found that financial executives typically viewed distributions as residual—that is, made after investment and liquidity needs had been met. Jesse Fried and Charles Wang showed that claims that public companies distributed nearly all their earnings ignored the capital flowing back through equity issuances. Once those inflows were counted, net shareholder payouts were much lower, while investment and cash balances both increased.
Other studies find that repurchasing firms often face declining growth opportunities, a pattern consistent with mature companies returning capital after attractive opportunities diminish. Paul Brockman, Hye Seung Lee, and Jesus Salas likewise find no evidence that repurchasing firms systematically reduce capital expenditures, research and development, or employment after accounting for their opportunity sets. These findings accord with Michael Jensen’s account of the agency costs of free cash flow: managers sometimes control more cash than they can deploy productively, and returning excess capital can help prevent empire-building and poor acquisitions.
These findings do not vindicate every repurchase. Research shows that managers sometimes sacrifice investment opportunities to meet earnings-per-share targets or to support the price at which executives sell their own shares. But those studies support targeted responses—not Section 815’s enterprise-wide rule, which would apply without regard to earnings targets, compensation design, insider sales, the price paid for shares, the contractor’s investment opportunities, or the performance of the contract that triggers the restriction.
Indeed, Section 815 reverses the ordinary presumption that boards may return excess cash to shareholders when there are no efficient investment opportunities. Unless the Pentagon approves a qualifying investment plan, a contractor who wishes to continue doing business with the government must retain capital it otherwise would have distributed. The provision thus transfers part of the authority to allocate corporate capital from boards and markets to procurement officials.
The strongest argument for Section 815 is that defense production is not an ordinary market. Capacity can be expensive and difficult to rebuild. A production line may have substantial national-security value even when it does not promise an adequate private return. Contractors may rationally hesitate to invest when appropriations are uncertain, orders fluctuate, technical requirements change, or the government will not commit to buying the resulting output.
But all of these are contracting problems, not payout problems. Preventing a dividend does not make future demand more predictable, compensate a firm for maintaining idle capacity, resolve technical uncertainty, or identify which expenditure would relieve a genuine production constraint. Nor does it create a positive-return project where none exists. A diversified contractor may retain the money and use it elsewhere, repay debt, acquire another business, or simply hold more cash.
Nor does Section 815’s waiver mechanism—which applies to contractors with an approved defense-investment plan covering facilities, equipment, research, workforce training, or strategic stockpiles—solve this problem. It requires the Pentagon to decide not only what product it wants, at what price, and on what schedule, but also whether a contractor’s proposed investment plan justifies permitting firm-wide dividends or repurchases. Those judgments require forecasts about demand, financing, opportunity cost, and investment returns that procurement officials are poorly positioned to make. The process will also favor expenditures that fit statutory categories, not necessarily those that create the greatest value.
Section 815 is also likely to generate costly reactions. Contractors will devote resources to obtaining waivers, reclassify ordinary spending as qualifying investment, and select projects that satisfy statutory categories. Some firms—especially diversified companies, for which defense sales are small—may decide that Pentagon work is not worth an enterprise-wide restriction on financial policy. This could deter the commercial entrants and dual-use suppliers that policymakers otherwise seek to attract. The remaining contractors’ added costs will appear in higher bids, reduced entry, a less diverse supplier base, more conservative financing, and a higher cost of capital.
The more direct response is for the Pentagon to contract for the capacity the government values. Multiyear purchase commitments can reduce demand risk. Capacity-reservation contracts can pay firms to maintain surge capability. Advance commitments, milestone financing, co-investment, and cost sharing can make socially valuable investments privately worthwhile. These tools address the reason a contractor may decline to invest far better than a payout prohibition would.
Section 815 originates from a legitimate concern: national defense should not suffer because contractors prefer short-term financial rewards to necessary investment. The evidence confirms that distorted repurchases can occur, but it does not show that payouts generally crowd out productive investment, or that preventing a distribution will convert retained cash into factories, research, or weapons.
Congress should condition defense contracts on the capacity, cost, and delivery it needs, and tie consequences to actual underperformance. Section 815 instead regulates an observable financial decision because it is easier to police than the procurement failures Congress wants to correct. That’s a weak substitute for procurement reform—and a consequential expansion of political authority over private capital allocation.