Product Market Uncertainty and M&A Activity: Evidence from the Oil and Gas Sector

Abstract

This study examines the impact of uncertainty on mergers and acquisition (M&A) activity. We focus on product market uncertainty in the oil and gas sector. Analysing this industry enables us to construct a natural forward-looking measure of product market uncertainty, namely the implied crude oil volatility. Using a sample of U.S. firms in the oil and gas sector from 1994-2018 and 4,323 announced transactions, we document that product market uncertainty is negatively related to future M&A activity. Uncertainty is mainly a driver of horizontal and vertical M&A, while output price uncertainty of upstream firms is a more important driver of M&A activity than the input price uncertainty of downstream firms. Our results lend support to a real options explanation of investment under uncertainty where firms choose to defer investments as a response to increased uncertainty.

Keywords: Energy economics, M&A, Corporate investment, Product market uncertainty, Implied crude oil volatility, Oil and gas sector

JEL Classification: D81, G34, Q40, Q43, Q49