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Do big oil companies fleece America? The soaring oil prices and the record profits generated by oil companies have placed the above question at the forefront of media spotlight, public discourse, and even congressional hearings. The common public perception is that oil companies make huge windfall profits on the one hand and use their clout with political leaders to receive massive tax breaks on the other. Together with these, mere is also anecdotal evidence from the popular press that the sole aim of oil companies is to satisfy shareholders and ignore other stakeholders - especially consumers. Critics contend mat oil companies, therefore, distribute vast amounts of shareholder dividends instead of investing in capital expenditures. These charges are brushed aside by oil companies. Oil companies claim mat they not only invest substantial amounts on capital expenditure but also restrain shareholder dividends.
That the big oil and gas firms are politically pressured has been well researched.1 Large firms, due to their very size, attract the attention of bureaucrats and politicians. As a result, economic decisions of larger firms are likely to be influenced by political sensitivities. For instance, Solomon and Sullivan (1991) reported that oil companies were fearful of reporting large profits caused by rising prices after the Iraqi invasion of Kuwait. As a result, large oil companies choose accounting methods that reduce accounting profits (Watts and Zimmerman, 1986). Results of empirical papers on this subject have generally been consistent with this political cost hypotiiesis. According to Larcker and Revsine (1983, p.714) " . . .Government regulation might be toe most important 'political' effect in toe oil and gas setting. . . ."
While large profit increases are toe basis of public anger, backlash, and discontent, the popular press often reports profits witoout reference to footnotes, changes in accounting principles, accounting methods, or estimates. Steven Hall (1993, pp. 327-328) discusses how The New York Times reported Texaco's profit for the year 1978,2 witoout making any adjustments for the accounting change. More crucially, accounting profits and financial figures may be reported without a lair comparison with other equally large companies in other industries. Thus the uninformed public may be carried away by negative reports about oil companies' profitability in the popular press.
The central tiieme of me...