Investment Catering in the Oil and Gas Industry

Abstract

This thesis study investment decisions in the oil and gas industry, assuming market inefficiency and the potential presence of less-than rational investors that may influence the stock price. That is, testing the theory of investment catering to study how stock prices deviations from firms’ fundamentals might influence managers’ investment decisions. The analysis is conducted using a dynamic panel data set in with two-step system Generalized Method of Moments estimator with Windmeijer correction and principal component analysis. The results show positive relation between cash flow and investment, consistent with established research. And, the proxy for mispricing, discretionary accruals are statistically significant and positively related to investment, suggesting that firms increase investment level when overvalued and inversely for undervalued firms. In addition, the proxy for investment premium is significant, implying presence of investor sentiment concerning firm investment.