IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v70y2018icp190-204.html
   My bibliography  Save this article

Value of investment: Evidence from the oil and gas industry

Author

Listed:
  • Sabet, Amir H.
  • Agha, Mahmoud
  • Heaney, Richard

Abstract

Does capital investment create wealth for oil and gas firms? Event study analysis of investment in both conventional and unconventional resources is made to answer this question. Using a sample of 1282 acquisition and 1503 divestiture announcements over the period 1989 to 2011 we find that resource acquisition increases equity value consistent with information asymmetry arguments while resource divestiture also increases value consistent with portfolio arguments. The technological innovation literature suggests that investment in (divestment of) technologically complex assets could result in losses (gains) relative to simpler assets. On the assumption that exploitation of unconventional resources requires more innovative technology than conventional resources, we compare returns to conventional versus unconventional but find little evidence to support this prediction. Further, we find positive total wealth effects associated with these transactions, where both buyer and seller benefiting from the transactions on average. Finally, longer term analysis of returns to buy and hold transactions shows little evidence to support market biases in reaction to acquisition or divestiture announcements.

Suggested Citation

  • Sabet, Amir H. & Agha, Mahmoud & Heaney, Richard, 2018. "Value of investment: Evidence from the oil and gas industry," Energy Economics, Elsevier, vol. 70(C), pages 190-204.
    • Handle: RePEc:eee:eneeco:v:70:y:2018:i:c:p:190-204
    DOI: 10.1016/j.eneco.2018.01.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988318300148
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2018.01.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Timothy J. Brailsford & Daniel Yeoh, 2004. "Agency Problems and Capital Expenditure Announcements," The Journal of Business, University of Chicago Press, vol. 77(2), pages 223-256, April.
    3. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    4. Jain, Bharat A. & Kini, Omesh & Shenoy, Jaideep, 2011. "Vertical divestitures through equity carve-outs and spin-offs: A product markets perspective," Journal of Financial Economics, Elsevier, vol. 100(3), pages 594-615, June.
    5. Seyed Amir Hossein Sabet & Marie-Anne Cam & Richard Heaney, 2012. "Share market reaction to the BP oil spill and the US government moratorium on exploration," Australian Journal of Management, Australian School of Business, vol. 37(1), pages 61-76, April.
    6. Mitchell, Mark L & Mulherin, J Harold, 1994. "The Impact of Public Information on the Stock Market," Journal of Finance, American Finance Association, vol. 49(3), pages 923-950, July.
    7. Rosenfeld, James D, 1984. "Additional Evidence on the Relation between Divestiture Announcements and Shareholder Wealth," Journal of Finance, American Finance Association, vol. 39(5), pages 1437-1448, December.
    8. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    9. Fu, Fangjian & Lin, Leming & Officer, Micah S., 2013. "Acquisitions driven by stock overvaluation: Are they good deals?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 24-39.
    10. Sicherman, Neil W & Pettway, Richard H, 1987. "Acquisition of Divested Assets and Shareholders' Wealth," Journal of Finance, American Finance Association, vol. 42(5), pages 1261-1273, December.
    11. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
    12. Miller, Merton H & Upton, Charles W, 1985. "A Test of the Hotelling Valuation Principle," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 1-25, February.
    13. Neil W. Sicherman & Richard H. Pettway, 1992. "Wealth Effects for Buyers and Sellers of the Same Divested Assets," Financial Management, Financial Management Association, vol. 21(4), Winter.
    14. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    15. Luboš Pástor & Pietro Veronesi, 2009. "Technological Revolutions and Stock Prices," American Economic Review, American Economic Association, vol. 99(4), pages 1451-1483, September.
    16. Mohn, Klaus & Misund, Bård, 2008. "Shifting sentiments in Firm Investment: An Application to the Oil Industry," UiS Working Papers in Economics and Finance 2009/12, University of Stavanger.
    17. Ball, R & Brown, P, 1968. "Empirical Evaluation Of Accounting Income Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 159-178.
    18. Dimitrios Ghicas & Victor Pastena, 1989. "The acquisition value of oil and gas firms: The role of historical costs, reserve recognition accounting, and analysts' appraisals," Contemporary Accounting Research, John Wiley & Sons, vol. 6(1), pages 125-142, September.
    19. Magliolo, J, 1986. "Capital-Market Analysis Of Reserve Recognition Accounting," Journal of Accounting Research, Wiley Blackwell, vol. 24, pages 69-108.
    20. Thomas W. Bates, 2005. "Asset Sales, Investment Opportunities, and the Use of Proceeds," Journal of Finance, American Finance Association, vol. 60(1), pages 105-135, February.
    21. Peter Klibanoff & Owen Lamont & Thierry A. Wizman, 1998. "Investor Reaction to Salient News in Closed-End Country Funds," Journal of Finance, American Finance Association, vol. 53(2), pages 673-699, April.
    22. Halpern, Paul, 1983. "Corporate Acquisitions: A Theory of Special Cases? A Review of Event Studies Applied to Acquisitions," Journal of Finance, American Finance Association, vol. 38(2), pages 297-317, May.
    23. Haushalter, G. David & Heron, Randall A. & Lie, Erik, 2002. "Price uncertainty and corporate value," Journal of Corporate Finance, Elsevier, vol. 8(3), pages 271-286, July.
    24. Hsu, Kuang-Chung & Wright, Michael & Zhu, Zhen, 2017. "What motivates merger and acquisition activities in the upstream oil & gas sectors in the U.S.?," Energy Economics, Elsevier, vol. 65(C), pages 240-250.
    25. David Hirshleifer & Sonya Seongyeon Lim & Siew Hong Teoh, 2009. "Driven to Distraction: Extraneous Events and Underreaction to Earnings News," Journal of Finance, American Finance Association, vol. 64(5), pages 2289-2325, October.
    26. Rossi, Stefano & Volpin, Paolo F., 2004. "Cross-country determinants of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 74(2), pages 277-304, November.
    27. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    28. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
    29. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    30. James W. Kolari & Seppo Pynnönen, 2010. "Event Study Testing with Cross-sectional Correlation of Abnormal Returns," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 3996-4025, November.
    31. Mohn, Klaus & Misund, Bård, 2009. "Investment and uncertainty in the international oil and gas industry," Energy Economics, Elsevier, vol. 31(2), pages 240-248, March.
    32. Hirshleifer, David & Hsu, Po-Hsuan & Li, Dongmei, 2013. "Innovative efficiency and stock returns," Journal of Financial Economics, Elsevier, vol. 107(3), pages 632-654.
    33. Warusawitharana, Missaka, 2008. "Corporate asset purchases and sales: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 87(2), pages 471-497, February.
    34. Mulherin, J. Harold & Boone, Audra L., 2000. "Comparing acquisitions and divestitures," Journal of Corporate Finance, Elsevier, vol. 6(2), pages 117-139, July.
    35. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    36. Reid W Click & Robert J Weiner, 2010. "Resource nationalism meets the market: Political risk and the value of petroleum reserves," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(5), pages 783-803, June.
    37. Jain, Prem C, 1985. "The Effect of Voluntary Sell-off Announcements on Shareholder Wealth," Journal of Finance, American Finance Association, vol. 40(1), pages 209-224, March.
    38. Moeller, Sara B. & Schlingemann, Frederik P. & Stulz, Rene M., 2004. "Firm size and the gains from acquisitions," Journal of Financial Economics, Elsevier, vol. 73(2), pages 201-228, August.
    39. Harford, Jarrad & Humphery-Jenner, Mark & Powell, Ronan, 2012. "The sources of value destruction in acquisitions by entrenched managers," Journal of Financial Economics, Elsevier, vol. 106(2), pages 247-261.
    40. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    41. Gustavo Grullon & Evgeny Lyandres & Alexei Zhdanov, 2012. "Real Options, Volatility, and Stock Returns," Journal of Finance, American Finance Association, vol. 67(4), pages 1499-1537, August.
    42. Kim, Chyhe Esther, 1998. "The Effects of Asset Liquidity: Evidence from the Contract Drilling Industry," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 151-176, April.
    43. Chung, Kee H. & Wright, Peter & Charoenwong, Charlie, 1998. "Investment opportunities and market reaction to capital expenditure decisions," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 41-60, January.
    44. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    45. Janis K. Zaima & Douglas Hearth, 1985. "The Wealth Effects Of Voluntary Selloffs: Implications For Divesting And Acquiring Firms," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 8(3), pages 227-236, September.
    46. Ng, Alex & Donker, Han, 2013. "Purchasing reserves and commodity market timing as takeover motives in the oil and gas industry," Energy Economics, Elsevier, vol. 37(C), pages 167-181.
    47. Kaplan, Steven N & Weisbach, Michael S, 1992. "The Success of Acquisitions: Evidence from Divestitures," Journal of Finance, American Finance Association, vol. 47(1), pages 107-138, March.
    48. Datta, Sudip & E. Iskandar-Datta, Mai, 1995. "Corporate partial acquisitions, total firm valuation and the effect of financing method," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 97-115, April.
    49. Howard Rogers, 2011. "Shale gas--the unfolding story," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(1), pages 117-143, Spring.
    50. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, June.
    51. McConnell, John J. & Muscarella, Chris J., 1985. "Corporate capital expenditure decisions and the market value of the firm," Journal of Financial Economics, Elsevier, vol. 14(3), pages 399-422, September.
    52. Akhigbe, Aigbe & Martin, Anna D. & Whyte, Ann Marie, 2007. "Partial acquisitions, the acquisition probability hypothesis, and the abnormal returns to partial targets," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3080-3101, October.
    53. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December.
    54. Hite, Gailen L. & Owers, James E. & Rogers, Ronald C., 1987. "The market for interfirm asset sales : Partial sell-offs and total liquidations," Journal of Financial Economics, Elsevier, vol. 18(2), pages 229-252, June.
    55. Boone, Jeffery P., 1998. "Oil and gas reserve value disclosures and bid-ask spreads," Journal of Accounting and Public Policy, Elsevier, vol. 17(1), pages 55-84.
    56. Uysal, Vahap B., 2011. "Deviation from the target capital structure and acquisition choices," Journal of Financial Economics, Elsevier, vol. 102(3), pages 602-620.
    57. Lind, Barry & Plott, Charles R, 1991. "The Winner's Curse: Experiments with Buyers and with Sellers," American Economic Review, American Economic Association, vol. 81(1), pages 335-346, March.
    58. Raghavendra Rau, P. & Vermaelen, Theo, 1998. "Glamour, value and the post-acquisition performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 49(2), pages 223-253, August.
    59. Stephen C. Vogt, 1997. "Cash Flow and Capital Spending: Evidence from Capital Expenditure Announcements," Financial Management, Financial Management Association, vol. 26(2), Summer.
    60. Gur Huberman & Tomer Regev, 2001. "Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar," Journal of Finance, American Finance Association, vol. 56(1), pages 387-396, February.
    61. Paul L. Joskow, 2013. "Natural Gas: From Shortages to Abundance in the United States," American Economic Review, American Economic Association, vol. 103(3), pages 338-343, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mason, Charles F. & Wilmot, Neil A., 2020. "Jumps in the convenience yield of crude oil," Resource and Energy Economics, Elsevier, vol. 60(C).
    2. Sharma, Sunil & Sud, Mukesh, 2019. "Impact of regulatory framework on bidding behavior of firms: Policy implications for the oil & gas sector," Energy Policy, Elsevier, vol. 131(C), pages 33-42.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sabet, Amir H. & Heaney, Richard, 2016. "An event study analysis of oil and gas firm acreage and reserve acquisitions," Energy Economics, Elsevier, vol. 57(C), pages 215-227.
    2. Renneboog, Luc & Vansteenkiste, Cara, 2019. "Failure and success in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 650-699.
    3. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    4. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    5. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.
    6. ATM Adnan, 2018. "Home vs. Cross-Border Takeovers: Is There Any Difference in Investor Perception?," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2018(2), pages 59-84.
    7. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 27, July-Dece.
    8. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    9. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-029, Tilburg University, Tilburg Law and Economic Center.
    10. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2015.
    11. Renneboog, Luc & Vansteenkiste, Cara, 2019. "Failure and success in mergers and acquisitions," Other publications TiSEM 9baa3ffc-67cb-4647-9da5-a, Tilburg University, School of Economics and Management.
    12. Jory, Surendranath R. & Ngo, Thanh N., 2015. "The wealth effects of acquiring foreign divested assets," International Business Review, Elsevier, vol. 24(2), pages 235-245.
    13. Taher Hamza, 2011. "Determinants of short-term value creation for the bidder: evidence from France," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 15(2), pages 157-186, May.
    14. Martynova, M. & Renneboog, L.D.R., 2006. "The Performance of the European Market for Corporate Control : Evidence from the 5th Takeover Wave," Discussion Paper 2006-118, Tilburg University, Center for Economic Research.
    15. Neelam Rani & Surendra S Yadav & P.K. Jain, 2015. "Impact of Mergers and Acquisitions on Shareholders’ Wealth in the Short Run: An Event Study Approach," Vikalpa: The Journal for Decision Makers, , vol. 40(3), pages 293-312, September.
    16. Jory, Surendranath R. & Madura, Jeff & Ngo, Thanh N., 2012. "Deal structure decision in the global market for divested assets," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 104-116.
    17. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
    18. Sheng-Syan Chen & Yong-Chin Liu & I-Ju Chen, 2014. "Long-Run Stock Performance and Its Determinants for Asset Buyers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 685-716, June.
    19. Mateev, Miroslav & Andonov, Kristiyan, 2018. "Do European bidders pay more in cross-border than in domestic acquisitions? New evidence from Continental Europe and the UK," Research in International Business and Finance, Elsevier, vol. 45(C), pages 529-556.
    20. Kanungo, Rama Prasad, 2021. "Uncertainty of M&As under asymmetric estimation," Journal of Business Research, Elsevier, vol. 122(C), pages 774-793.

    More about this item

    Keywords

    Market efficiency; Acquisition; Divestitures; Conventional and unconventional oil and gas resources;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:70:y:2018:i:c:p:190-204. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.