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

34 Pages Posted: 16 Jun 2020

See all articles by Samuel D. Barrows

Samuel D. Barrows

KIMEP University

Magnus Blomkvist

Audencia Business School

Nebojsa Dimic

University of Vaasa

Milos Vulanovic

EDHEC Business School

Date Written: May 22, 2020

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

Suggested Citation

D. Barrows, Samuel and Blomkvist, Magnus and Dimic, Nebojsa and Vulanovic, Milos, Product Market Uncertainty and M&A Activity: Evidence from the Oil and Gas Sector (May 22, 2020). Available at SSRN: https://ssrn.com/abstract=3607776 or http://dx.doi.org/10.2139/ssrn.3607776

Samuel D. Barrows

KIMEP University ( email )

2, Abai ave.
Almaty, 050010
Kazakhstan

Magnus Blomkvist

Audencia Business School

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Nebojsa Dimic

University of Vaasa ( email )

Wolffintie 34
Vaasa, 65200
Finland

Milos Vulanovic (Contact Author)

EDHEC Business School ( email )

24, avenue Gustave Delory
CS 50411
Roubaix, 59057
France

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