Chair of Financial Accounting –

Prior research has failed to document a consistent association between oil prices and stock prices.  We propose and examine whether that failure is due to the need to link oil price changes to firm-level changes in earnings and investments.  We find that the impact of oil prices on a firm’s earnings and investments varies significantly by industry and by whether the firm is an oil producer or oil consumer.  Nevertheless, firm fixed effects explain more than ten times the variation between oil prices and firm performance/investments than industry and time fixed effects combined, indicating that aggregation by industry and time can mask the unique impact of oil prices on an individual firm’s earnings and investments.  We also find that investors react more strongly to oil-related earnings than non-oil-related earnings, particularly for oil consumers.  Investor reaction to oil-related earnings also spills over to the stock prices of industry peers.  By providing a firm-level mapping of the impact of oil prices on performance/ investments and stock prices, our paper extends prior studies that examine the impact of oil prices on the aggregate economy and stock markets.

We find that firm-level investment is negatively related to the likelihood of meeting or beating analysts’ short-term EPS forecasts. In a 35-year panel dataset of US based companies, we find evidence that suggests firms with the best growth opportunities, opaque firms, and firms with higher than usual bonus compensation, are the ones to alter investment in order to beat benchmarks. Utilizing the passage of Sarbanes-Oxley as a natural experiment we find that firms trade off accruals-based earnings management in lieu of investment cuts. Results are robust to a number of covariates, and endogeneity or reverse causality does not seem to drive our inferences. This study suggests that, consistent with survey results from Graham, Harvey, and Rajgopal [2005. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics 40: 3–73], managers may reduce or delay corporate investment to meet or beat short-term earnings benchmarks.

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This paper examines the relation between the investment horizon of banks and their CEO compensation, and its consequences for risk and performance. We find that banks with short-term investment intensity pay more cash bonus, exhibit higher risk and perform more poorly than banks with longer-term investment intensity. This evidence is broadly consistent with the view that short-term means of compensation encouraged a short-term investment focus, which in turn led to both higher risk and resulted in poorer performance, culminating in the sub-prime crisis. The inverse risk-performance relation suggests pay schemes were incongruent with shareholders’ interest. Moreover, pay arrangements used in banks prior to the subprime crisis exposed banks to the ex-post settling up problem (the clawback problem).

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By employing the theoretical template provided by agency theory, this paper contributes a detailed clinical analysis of a large multinational Canada-headquartered telecommunications company, Nortel. Our analysis reveals a 21st century norm of usual suspects: a CEO whose compensation is well above those of his peers, a dysfunctional board of directors, acts of income smoothing to preserve the confidence of volatile investors, and revelations of financial irregularities followed by a downfall. In many ways, the spectacular rise and - sudden - fall of Nortel illustrate excesses of actors within, and contradictions of the system of corporate governance implied by the agency model. Furthermore, this case illustrates limitations of the agency framework in complex situations with short-term oriented investors.

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