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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a b s t r a c tIn 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 ofthe 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 size1. 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. Itfollows 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, theeffect of oil price on returns will occur with a lag. In this paper, we consider whether oil price affects returns of ﬁrms as opposed to market returns. This study is motivated by three pioneering works in the ﬁeld; namely, Jones and Kaul (1996), Chen et al. (1986), and Driesprong et al. (2008). Jones and Kaul (1996) use a time series regression model to examine the effect of real oil price on realstock returns based on quarterly data for four developed countries, namely US
q This paper is a chapter from the second author’s PhD thesis entitled ‘‘Three Essays on Financial Markets’’. ⇑ Corresponding author. Tel./fax: +61 3 92446180. E-mail addresses: email@example.com (P.K. Narayan), susan.sharma@ gmail.com (S.S. Sharma).
(1947–1991), Canada (1960–1991), Japan (1970–1991), and theUK (1962–1991). They ﬁnd that oil price has a negative effect on aggregate real returns for all four countries. Chen et al. (1986) consider a multivariate regression model where market returns was represented as a function of a range of macroeconomic variables and oil prices for the US. Their empirical analysis is based on monthly data for the period 1953–1983. They ﬁnd a statisticallyinsigniﬁcant effect of oil price on market returns. Driesprong et al. (2008) examine the effect of oil prices on aggregate stock market returns using monthly data for the period October 1973–April 2003 for 48 developed and developing countries. They ﬁnd the relationship to be negative and statistically signiﬁcant for 17 out of the 18 developed countries, and while it is still negative and signiﬁcant fordeveloping countries, the bulk of the relationships are however statistically insigniﬁcant. A common feature of all these studies is that they focus on the aggregate market. Jones and Kaul (1996) examine the aggregate market of the US, Canada, Japan, and the UK; Chen et al. (1986) consider the US aggregate market, and Driesprong et al. (2008) examine the aggregate stock market indices of 18...
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