Accounting Faculty Member Co-authors Award-winning Article

ROCK HILL, SOUTH CAROLINA — A Winthrop University accounting faculty member co-wrote an article that won an award this summer from a prestigious academic journal.

Adriana Cordis, an associate professor of accounting at Winthrop, and Chris Kirby of the University of North Carolina Charlotte submitted their paper, entitled "Capital expenditures and firm performance: evidence from a cross-sectional analysis of stock returns," for publication in Accounting & Finance, an academic journal published in cooperation with the Accounting and Finance Association of Australia and New Zealand (AFAANZ). It appeared in the December 2017 issue.

Their article won the Peter Brownell Manuscript Award for the best paper published in the journal in 2017. The award was announced at the AFAANZ conference in July.

Cordis said their paper looks at the relation between capital investment and stock market performance. They started with the question: do the capital investment decisions of managers affect the value of a firm's stock?

"In theory, the managers of a firm should not invest in new projects unless doing so increases shareholder value," Cordis said. But prior academic studies find an inverse relation between capital investment and average stock returns across firms, which has been interpreted as evidence that many managers overinvest in capital projects and destroy shareholder value.

Cordis and Kirby questioned this conventional wisdom. "If investors demand a high expected rate of return for holding a firm's stock, then the managers of the firm should use a high cost of capital (discount rate) to compute the net present value of new projects," the two wrote. "Hence, firms that have high expected stock returns should exhibit both lower levels of capital investment and higher stock returns than firms that have low expected stock returns, all else being equal."

Their paper formalized this argument using a simple two-period model of optimal investment, and showed that the model's predictions find substantial support in the data. Their results therefore pose a challenge to those who argue that overinvestment is a widespread feature of capital-budgeting practices.

Accounting & Finance is widely read by academics, graduate students and all those interested in research in accounting and finance, as well as practitioners in accounting, corporate finance, investments, and merchant and investment banking.
 
For more information, contact Cordis at cordisa@winthrop.edu.