The purpose of this study is to examine the relative stock market performance of US defense stocks over different time periods and analyze the impact of changes in Federal Acquisition Policy on defense stock returns. The data set covers monthly returns of 67 defense stocks during the period 1945-2000. The analysis consists of two parts. Relative performance analysis and the event study analysis. The results of the relative performance analysis showed that defense stocks portfolio is both more profitable and riskier than the size based benchmark. However, the difference was not found to be statistically significant. On the other hand, the event study analysis indicates that defense firms significantly reacted to nine major regulatory changes that occurred during the sample period. Only two of the nine regulatory changes examined resulted in statistically significant average excess returns. For other regulations, the sign and the magnitude of the reaction varies across firms.