The solid-state reaction of thin Pd films with GaAs substrates has been investigated using Auger sputter profiling, x-ray diffraction, He-ion backscattering, and sheet-resistivity measurements. Fast diffusion and dissolution were observed for both As and Ga into Pd, which slowed down after distinct compound layers were formed. The kinetics of Pd penetration into GaAs was found to be controlled by diffusion with an activation energy of 1.4 eV. The As and Ga compounds formed as a result of contact reactions were identified to be PdAs2 and PdGa at 250°C; PdAs2, PdGa, and Pd 2Ga at 350°C; and PdGa at 500°C. For each annealing temperature a "steady-state" time is reached when there is no measurable change in the backscattering spectra. The sheet resistivity of the contact was found to increase with time under isothermal annealing and eventually reached a saturation value. The saturation time of resistivity change is well correlated to the steady-state time. To determine the effect of the contact reaction on device performance, p-n junction solar cells fabricated by diffusing Zn into an n-type GaAs wafer with Pd and Ag contact layers have been tested. An onset of shunting was observed on the solar devices after heat treatments above 200°C. Results indicated that shunting is most probably due to Pd penetration through localized defects in the p layer of GaAs.