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Oil Price Shocks, Firm Uncertainty, And Investment

Author

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  • Lee, Kiseok
  • Kang, Wensheng
  • Ratti, Ronald A.

Abstract

This paper seeks to answer the following questions: Do oil price shocks affect firms' investment decisions? Do oil price shocks affect investment decisions differentially depending on firm-specific uncertainty? Over what time horizon do oil price shocks affect high-uncertainty firms? Is the intensity of the oil price shock important, or just its existence? It is found that oil price shocks depress firms' investment decisions, and do so differentially by depressing investment more for more uncertain firms. Oil shocks affect investment for at least the first and second year after the shock. In the short term, the mere existence of a shock drives most of the effect. In the long term, the intensity of the oil shock is also important. Bloom, Bond, and Van Reenan's result [Review of Economic Studies 74, 391–415 (2007)] regarding responsiveness to demand shocks being eroded at more uncertain firms for data on U.K. firms is replicated using data on U.S. firms and persists after oil shocks are considered.

Suggested Citation

  • Lee, Kiseok & Kang, Wensheng & Ratti, Ronald A., 2011. "Oil Price Shocks, Firm Uncertainty, And Investment," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 416-436, November.
    • Handle: RePEc:cup:macdyn:v:15:y:2011:i:s3:p:416-436_00
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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