Oil price uncertainty and M&A activity

Abstract

This study examines the impact of oil price uncertainty on mergers and acquisition (M&A) activity in the oil and gas sector. Analyzing this industry enables us to construct a natural forward-looking measure of oil price uncertainty, namely the implied crude oil volatility. Using a sample of U.S. firms in the oil and gas sector from 1994-2018 containing 4,323 announced transactions, we document that oil price uncertainty is negatively related to future M&A activity. Uncertainty is mainly a driver of horizontal and verticalM&A activity, where upstream firms are more affected by this uncertainty than 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