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OIL PRICE SHOCKS, FIRM UNCERTAINTY, AND INVESTMENT

Published online by Cambridge University Press:  20 December 2011

Kiseok Lee ,
Wensheng Kang  and
Ronald A. Ratti
Kiseok Lee
Affiliation:
Kyung Hee University
Wensheng Kang
Affiliation:
Kent State University
Ronald A. Ratti*
Affiliation:
University of Western Sydney
*
Address correspondence to: Ronald A. Ratti, School of Economics and Finance, University of Western Sydney, Locked Bag 1797, Penrith, NSW 2751, Australia; e-mail: [email protected].
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Abstract

This paper seeks to answer the following questions: Do oil price shocks affect firms' investment decisions? Do oil price shocks affect investment decisions differentially depending on firm-specific uncertainty? Over what time horizon do oil price shocks affect high-uncertainty firms? Is the intensity of the oil price shock important, or just its existence? It is found that oil price shocks depress firms' investment decisions, and do so differentially by depressing investment more for more uncertain firms. Oil shocks affect investment for at least the first and second year after the shock. In the short term, the mere existence of a shock drives most of the effect. In the long term, the intensity of the oil shock is also important. Bloom, Bond, and Van Reenan's result [Review of Economic Studies 74, 391–415 (2007)] regarding responsiveness to demand shocks being eroded at more uncertain firms for data on U.K. firms is replicated using data on U.S. firms and persists after oil shocks are considered.

Keywords

Oil Price ShocksFirm UncertaintyStock Price VolatilityInvestment
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S3: Oil Price Shocks , November 2011 , pp. 416 - 436
Copyright
Copyright © Cambridge University Press 2011

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