Oil price

Journal of Banking & Finance 35 (2011) 3253–3262

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Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf

New evidence on oil price and firm returns q
Paresh Kumar Narayan ⇑, Susan Sunila Sharma
School of Accounting, Economics, and Finance, Deakin University, Melbourne, Australia

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In this paper, we examine the relationship between oil price and firm returns for 560 US firms listed on the NYSE. First, we find that oil price affects returns of firms differently depending on their sectoral location. Second, we find strong evidence of lagged effect of oil price on firm returns. Third, we test whether oil price affects firm returns based on different regimes and find that in five out of the 14 sectors this is indeed the case. Finally, we unravel that oil price affects firm returns differently based on firm size, implying strong evidence of size effects. Ó 2011 Elsevier B.V. All rights reserved.

Article history: Received 31 December 2010 Accepted 11 May 2011 Available online 15 May 2011 JEL classification: G12 G15 Keywords: Oil price Firm returns Sectors Lagged effect Firm size

1. Introduction Several studies document that oil price has a negative effect on the macroeconomy (see Hamilton, 1983); for related studies, including those that forecast the volatility of crude oil prices, see Melick and Thomas (1997), MacLaury (1978), and Ederington and Guan (2010). Another branch of studies shows that higher economic growth leads to higher performance of the stock market. It follows that if a rise in oil price reduces the gross domestic product (GDP), it will reduce earnings of those firms for which oil is either a direct, or an indirect, factor in its cost of production. In this case, an increase in the oil price will reduce firm earnings, which will, in turn, lead to a fall in the stock price (effectively a fall in returns). If the stock market is inefficient, the