IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v26y2021i1d10.1007_s11142-020-09556-7.html
   My bibliography  Save this article

Oil prices, earnings, and stock returns

Author

Listed:
  • Steve Crawford

    (University of Houston)

  • Garen Markarian

    (WHU)

  • Volkan Muslu

    (University of Houston)

  • Richard Price

    (University of Oklahoma)

Abstract

Research has failed to document a consistent association between oil prices and stock prices. We propose and examine whether that failure is due to the need to link oil price changes to firm-level changes in earnings and investments. We find that the impact of oil prices on a firm’s earnings and investments varies significantly by industry and by whether the firm is an oil producer or oil consumer. Nevertheless, firm fixed effects explain more than 10 times the variation between oil prices and a firm’s earnings and investments than industry and time fixed effects combined, indicating that aggregation by industry and time can mask the unique impact of oil prices on an individual firm’s earnings and investments. We also find that investors react more strongly to oil-related earnings than non-oil-related earnings, particularly for oil consumers. Investor reaction to oil-related earnings also spills over to the stock prices of industry peers. By providing a firm-level mapping of the impact of oil prices on earnings, investments, and stock prices, our paper extends studies that have examined the impact of oil prices on the aggregate economy and stock markets.

Suggested Citation

  • Steve Crawford & Garen Markarian & Volkan Muslu & Richard Price, 2021. "Oil prices, earnings, and stock returns," Review of Accounting Studies, Springer, vol. 26(1), pages 218-257, March.
    • Handle: RePEc:spr:reaccs:v:26:y:2021:i:1:d:10.1007_s11142-020-09556-7
    DOI: 10.1007/s11142-020-09556-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-020-09556-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-020-09556-7?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. Miao, Hong & Ramchander, Sanjay & Wang, Tianyang & Yang, Dongxiao, 2017. "Influential factors in crude oil price forecasting," Energy Economics, Elsevier, vol. 68(C), pages 77-88.
    2. Christiane Baumeister & Lutz Kilian, 2016. "Lower Oil Prices and the U.S. Economy: Is This Time Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 287-357.
    3. Christiane Baumeister & Gert Peersman, 2013. "Time-Varying Effects of Oil Supply Shocks on the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 1-28, October.
    4. Srivastava, Anup, 2014. "Why have measures of earnings quality changed over time?," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 196-217.
    5. Coleman, Les, 2012. "Explaining crude oil prices using fundamental measures," Energy Policy, Elsevier, vol. 40(C), pages 318-324.
    6. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
    7. Bailey, Warren & Chang, K C, 1993. "Macroeconomic Influences and the Variability of the Commodity Futures Basis," Journal of Finance, American Finance Association, vol. 48(2), pages 555-573, June.
    8. Driesprong, Gerben & Jacobsen, Ben & Maat, Benjamin, 2008. "Striking oil: Another puzzle?," Journal of Financial Economics, Elsevier, vol. 89(2), pages 307-327, August.
    9. Russell Lundholm & Linda A. Myers, 2002. "Bringing the Future Forward: The Effect of Disclosure on the Returns‐Earnings Relation," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 809-839, June.
    10. Yanbo Jin & Philippe Jorion, 2006. "Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 61(2), pages 893-919, April.
    11. Cherif, Reda & Hasanov, Fuad, 2013. "Oil Exporters’ Dilemma: How Much to Save and How Much to Invest," World Development, Elsevier, vol. 52(C), pages 120-131.
    12. Christiane Baumeister & Lutz Kilian, 2016. "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 139-160, Winter.
    13. Samuel B. Bonsall & Zahn Bozanic & Paul E.. Fischer, 2013. "What Do Management Earnings Forecasts Convey About the Macroeconomy?," Journal of Accounting Research, Wiley Blackwell, vol. 51(2), pages 225-266, May.
    14. Robert M. Bushman & Alina Lerman & X. Frank Zhang, 2016. "The Changing Landscape of Accrual Accounting," Journal of Accounting Research, Wiley Blackwell, vol. 54(1), pages 41-78, March.
    15. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    16. Foster, George, 1981. "Intra-industry information transfers associated with earnings releases," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 201-232, December.
    17. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, September.
    18. Davis, Steven J. & Haltiwanger, John, 2001. "Sectoral job creation and destruction responses to oil price changes," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 465-512, December.
    19. Collins, Daniel W. & Kothari, S. P. & Shanken, Jay & Sloan, Richard G., 1994. "Lack of timeliness and noise as explanations for the low contemporaneuos return-earnings association," Journal of Accounting and Economics, Elsevier, vol. 18(3), pages 289-324, November.
    20. Chuk, Elizabeth & Matsumoto, Dawn & Miller, Gregory S., 2013. "Assessing methods of identifying management forecasts: CIG vs. researcher collected," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 23-42.
    21. Dargay, Joyce M. & Gately, Dermot, 2010. "World oil demand's shift toward faster growing and less price-responsive products and regions," Energy Policy, Elsevier, vol. 38(10), pages 6261-6277, October.
    22. Jeffery Abarbanell & Hyungshin Park, 2017. "Do Bright-Line Earnings Surprises Really Affect Stock Price Reactions?," Management Science, INFORMS, vol. 63(4), pages 1063-1084, April.
    23. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-248, April.
    24. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    25. Don Bredin & John Elder & Stilianos Fountas, 2010. "The Effects of Uncertainty about Oil Prices in G-7," Working Papers 200840, Geary Institute, University College Dublin.
    26. Volkan Muslu & Suresh Radhakrishnan & K. R. Subramanyam & Dongkuk Lim, 2015. "Forward-Looking MD&A Disclosures and the Information Environment," Management Science, INFORMS, vol. 61(5), pages 931-948, May.
    27. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
    28. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May.
    29. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    30. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 901-932.
    31. Jones, Charles M & Kaul, Gautam, 1996. "Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-491, June.
    32. Narayan, Paresh Kumar & Sharma, Susan Sunila, 2011. "New evidence on oil price and firm returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3253-3262.
    33. Roger D. Huang & Ronald W. Masulis & Hans R. Stoll, 1996. "Energy shocks and financial markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(1), pages 1-27, February.
    34. Lee, Kiseok & Ni, Shawn, 2002. "On the dynamic effects of oil price shocks: a study using industry level data," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 823-852, May.
    35. G. David Haushalter, 2000. "Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 55(1), pages 107-152, February.
    36. deHaan, Ed & Shevlin, Terry & Thornock, Jacob, 2015. "Market (in)attention and the strategic scheduling and timing of earnings announcements," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 36-55.
    37. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-566.
    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. Qin Zhang & Jin Boon Wong, 2023. "The influence of oil price uncertainty on stock liquidity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(2), pages 141-167, February.
    2. Gan, Tian & Jiang, Yan & Wu, Xi & Zhang, Mingxin, 2023. "Oil price uncertainty and the cost of debt: Evidence from the Chinese bond market," Journal of Asian Economics, Elsevier, vol. 87(C).
    3. Hasan, Mostafa Monzur & Wong, Jin Boon & Al Mamun, Mohammed Abdullah, 2022. "Oil shocks and corporate social responsibility," Energy Economics, Elsevier, vol. 107(C).
    4. Wong, Jin Boon & Hasan, Mostafa Monzur, 2021. "Oil shocks and corporate payouts," Energy Economics, Elsevier, vol. 99(C).
    5. Yang, Baochen & Song, Xinyu, 2023. "Does oil price uncertainty matter in firm innovation? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 88(C).
    6. Wong, Jin Boon & Zhang, Qin, 2023. "Managerial performance and oil price shocks," Energy Economics, Elsevier, vol. 124(C).
    7. Hasan, Mostafa Monzur & Asad, Suzona & Wong, Jin Boon, 2022. "Oil price uncertainty and corporate debt maturity structure," Finance Research Letters, Elsevier, vol. 46(PA).
    8. Wen, Fenghua & Chen, Meng & Zhang, Yun & Miao, Xiao, 2023. "Oil price uncertainty and audit fees: Evidence from the energy industry," Energy Economics, Elsevier, vol. 125(C).
    9. Qin Zhang & Jin Boon Wong, 2022. "Do oil shocks impact stock liquidity?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 472-491, March.

    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. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    2. Stavros Degiannakis, George Filis, and Vipin Arora, 2018. "Oil Prices and Stock Markets: A Review of the Theory and Empirical Evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    3. Herrera, Ana María & Karaki, Mohamad B. & Rangaraju, Sandeep Kumar, 2019. "Oil price shocks and U.S. economic activity," Energy Policy, Elsevier, vol. 129(C), pages 89-99.
    4. Broadstock, David C. & Filis, George, 2014. "Oil price shocks and stock market returns: New evidence from the United States and China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 417-433.
    5. Jo, Soojin & Karnizova, Lilia & Reza, Abeer, 2019. "Industry effects of oil price shocks: A re-examination," Energy Economics, Elsevier, vol. 82(C), pages 179-190.
    6. Jochen H. F. Güntner & Katharina Linsbauer, 2018. "The Effects of Oil Supply and Demand Shocks on U.S. Consumer Sentiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1617-1644, October.
    7. Hodula Martin & Vahalík Bohdan, 2017. "Effects of oil shocks on EMU exports: technological level differences," Review of Economic Perspectives, Sciendo, vol. 17(4), pages 399-423, December.
    8. Gnimassoun, Blaise & Joëts, Marc & Razafindrabe, Tovonony, 2017. "On the link between current account and oil price fluctuations in diversified economies: The case of Canada," International Economics, Elsevier, vol. 152(C), pages 63-78.
    9. 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).
    10. James D. Hamilton, 2012. "Oil Prices, Exhaustible Resources, and Economic Growth," NBER Working Papers 17759, National Bureau of Economic Research, Inc.
    11. Sunil K. Mohanty & Joseph Onochie & Abdulrahman F. Alshehri, 2018. "Asymmetric effects of oil shocks on stock market returns in Saudi Arabia: evidence from industry level analysis," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 595-619, October.
    12. James D. Hamilton, 2013. "Oil prices, exhaustible resources and economic growth," Chapters, in: Roger Fouquet (ed.), Handbook on Energy and Climate Change, chapter 1, pages 29-63, Edward Elgar Publishing.
    13. Martín-Barragán, Belén & Ramos, Sofia B. & Veiga, Helena, 2015. "Correlations between oil and stock markets: A wavelet-based approach," Economic Modelling, Elsevier, vol. 50(C), pages 212-227.
    14. Lyu, Yifei, 2021. "Accounting for the declining economic effects of oil price shocks," Energy Economics, Elsevier, vol. 96(C).
    15. Lambertides, Neophytos & Savva, Christos S. & Tsouknidis, Dimitris A., 2017. "The effects of oil price shocks on U.S. stock order flow imbalances and stock returns," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 137-146.
    16. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    17. Gao, Lin & Hitzemann, Steffen & Shaliastovich, Ivan & Xu, Lai, 2022. "Oil volatility risk," Journal of Financial Economics, Elsevier, vol. 144(2), pages 456-491.
    18. Ramos, Sofia B. & Veiga, Helena, 2011. "Risk factors in oil and gas industry returns: International evidence," Energy Economics, Elsevier, vol. 33(3), pages 525-542, May.
    19. Rehman, Mobeen Ur & Vo, Xuan Vinh & McIver, Ron & Kang, Sang Hoon, 2022. "Sensitivity of US sectoral returns to energy commodities under different investment horizons and market conditions," Energy Economics, Elsevier, vol. 108(C).
    20. Blaise Gnimassoun & Marc Joëts & Tovonony Razafindrabe, 2016. "On the link between current account and oil price fluctuations in diversified economies: The case of Canada," Working Papers hal-04141574, HAL.

    More about this item

    Keywords

    Oil Price; Commodity markets; Earnings; Financial markets;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

    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:spr:reaccs:v:26:y:2021:i:1:d:10.1007_s11142-020-09556-7. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.