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Oil Price Shocks, Firm Uncertainty, And Investment

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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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    References listed on IDEAS

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    Cited by:

    1. Aye, Goodness C. & Dadam, Vincent & Gupta, Rangan & Mamba, Bonginkosi, 2014. "Oil price uncertainty and manufacturing production," Energy Economics, Elsevier, vol. 43(C), pages 41-47.
    2. Kang, Wensheng & Ratti, Ronald A. & Yoon, Kyung Hwan, 2015. "Time-varying effect of oil market shocks on the stock market," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 150-163.
    3. Caglayan, Mustafa & Xu, Bing, 2014. "Allocation effects of uncertainty on resources in Japan," Economics Letters, Elsevier, vol. 122(1), pages 23-26.
    4. Andrea Bastianin & Matteo Manera, 2015. "How Does Stock Market Volatility React to Oil Shocks?," Working Papers 2014.110, Fondazione Eni Enrico Mattei.
    5. Claudio Morana, 2013. "The Oil Price-Macroeconomy Relationship Since the Mid-1980s: A Global Perspective," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    6. H. Rajesh Acharya & C. Anver Sadath, 2016. "Energy Price Uncertainty and Investment: Firm Level Evidence from Indian Manufacturing Sector," International Journal of Energy Economics and Policy, Econjournals, vol. 6(3), pages 364-373.
    7. Kang, Wensheng & Ratti, Ronald A., 2013. "Oil shocks, policy uncertainty and stock market return," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 305-318.
    8. Njindan Iyke, Bernard, 2016. "Real Output and Oil Price Uncertainty: Evidence from an Oil Producing Country," MPRA Paper 71307, University Library of Munich, Germany, revised 01 Apr 2016.
    9. Mustafa Caglayan & Bing Xu, 2013. "Allocation Effects of Uncertainty on Resources in Japan," CFI Discussion Papers 1306, Centre for Finance and Investment, Heriot Watt University.

    More about this item

    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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