Oil Prices, Earnings, and Stock Returns
52 Pages Posted: 1 Jun 2017
Date Written: May 1, 2017
Using a comprehensive sample of U.S. firms over the last three decades, we document firms’ sales and expenses increase with oil prices, but earnings decrease with oil prices. Over time, oil prices have had an increasing impact on firm performance. In addition, large firms are more successful in passing on oil price increases to consumers, making large firms net beneficiaries of oil price increases. Furthermore, investors react more strongly to earnings that are associated with oil prices relative to earnings that are not associated with oil prices. Investors’ reaction to oil-related earnings relative to other earnings is stronger for (i) smaller firms, (ii) oil-consuming firms, and when (iii) oil prices are higher and less volatile, (iv) discount rates are lower, and (v) equity market hype and uncertainty are higher. These findings are robust to accounting for the potential endogeneity between oil prices and firm performance. Our findings prescribe caution in making uniform interpretations about the effects of oil prices on a firm’s performance and stock price.
Keywords: Oil Price, Commodity Markets, Earnings, Financial Markets
JEL Classification: G0, M40, Q02, D53
Suggested Citation: Suggested Citation