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Oil Price Shocks, Firm Uncertainty and Investment

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

Abstract

It is found that an oil price shock in interaction with a firm’s stock price volatility has a ‎negative effect on investment by that firm, both in the short and long-term. In the presence of ‎this interaction term, linear variables in oil price shocks are not statistically significant. There is ‎evidence that for the short-term effects of the interaction variable, the particular magnitude of an ‎oil price shock may not be as important as the fact that there is an oil price shock. For the long-‎term effects, however, the magnitude of the oil price shock does matter. Over a longer horizon, ‎oil price shocks depress investment more at firms facing greater uncertainty. An increase in firm ‎stock price volatility continues to reduce the link between sales growth and investment in the ‎presence of oil price shocks as in Bloom et al. (2007).‎

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  • Lee, Kiseok & Kang, Wensheng & Ratti, Ronald A., 2010. "Oil Price Shocks, Firm Uncertainty and Investment," MPRA Paper 49044, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:49044
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    4. 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.
    5. Xinheng Liu & Shuxian Li & Chengbo Fu & Xu Gong & Chen Fan, 2024. "The oil price plummeted in 2014–2015: Is there an effect on Chinese firms' labour investment?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 943-960, January.
    6. Caglayan, Mustafa & Xu, Bing, 2014. "Allocation effects of uncertainty on resources in Japan," Economics Letters, Elsevier, vol. 122(1), pages 23-26.
    7. Tarek Ghazouani, 2020. "Energy Price Shocks and Financial Market Integration: Evidence from New Keynesian Model," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 26(1), pages 13-32, February.
    8. Rajesh H. Acharya & Anver C. Sadath, 2018. "Revisiting the relationship between oil price and macro economy: Evidence from India," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2018(1), pages 173-190.
    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. Bastianin, Andrea & Manera, Matteo, 2018. "How Does Stock Market Volatility React To Oil Price Shocks?," Macroeconomic Dynamics, Cambridge University Press, vol. 22(3), pages 666-682, April.
    11. 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).
    12. Bugshan, Abdullah, 2022. "Oil price volatility and corporate cash holding," Journal of Commodity Markets, Elsevier, vol. 28(C).
    13. Dhaoui Abderrazak & Chevallier Julien & Ma Feng, 2021. "Identifying asymmetric responses of sectoral equities to oil price shocks in a NARDL model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 25(2), pages 1-19, April.
    14. Kang, Wensheng & Perez de Gracia, Fernando & Ratti, Ronald A., 2021. "Economic uncertainty, oil prices, hedging and U.S. stock returns of the airline industry," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    15. 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.
    16. Maghyereh, Aktham & Abdoh, Hussein, 2020. "Asymmetric effects of oil price uncertainty on corporate investment," Energy Economics, Elsevier, vol. 86(C).
    17. Peng Li & Yaofu Ouyang, 2023. "Oil price shocks and China’s consumer and entrepreneur sentiment: a Bayesian structural VAR approach," Empirical Economics, Springer, vol. 65(5), pages 2241-2271, November.
    18. 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.
    19. Basakha, Mehdi & Hossein Mohaqeqi Kamal, Seyed, 2019. "Industrial development and social welfare: A case study of Iran," Socio-Economic Planning Sciences, Elsevier, vol. 68(C).
    20. 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.
    21. Soma Patra, 2022. "Oil price shocks, firm entry and exit in a heterogeneous firm model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 349-378, February.
    22. 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.
    23. Alaali, Fatema, 2020. "The effect of oil and stock price volatility on firm level investment: The case of UK firms," Energy Economics, Elsevier, vol. 87(C).
    24. Ilyas, Muhammad & Khan, Aamir & Nadeem, Muhammad & Suleman, Muhammad Tahir, 2021. "Economic policy uncertainty, oil price shocks and corporate investment: Evidence from the oil industry," Energy Economics, Elsevier, vol. 97(C).
    25. 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.

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    More about this item

    Keywords

    Oil price shocks; firm uncertainty; stock price volatility; investment;
    All these keywords.

    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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