The purpose of this paper is to examine the impact of oil price shocks on capital spending in relation to the following firm characteristics: firm size, debt ratio, growth…
Abstract
Purpose
The purpose of this paper is to examine the impact of oil price shocks on capital spending in relation to the following firm characteristics: firm size, debt ratio, growth prospects, earnings and key sectors of the oil and gas industry.
Design/methodology/approach
To examine the impact of oil price changes on each of the sample firm’s capital spending, the authors utilize a vector autoregressive (VAR) framework which requires that the oil price and the firm’s capital spending series are stationary. The authors employ the Augmented Dickey–Fuller (ADF) procedure to test if these series are stationary in levels or in their first difference. Since the results show that the ADF values for adjusted oil price and for all but one capital spending series are stationary, the authors perform VAR analysis using the level data.
Findings
The impulse response results show that there is a positive relationship between oil price shocks and capital spending by the oil and gas firms. In other words, the oil and gas firms reduce (increase) capital spending when oil prices fall (rise). The responses are highest around q3. Additionally, the responses are stronger for the exploration and production, drilling, and oil services firms, and weaker for the refining firms (oil majors). Also, the small, low-earnings and low p/e firms exhibit the highest responses to oil price shocks. The impulse response results for the debt quartiles are inconclusive.
Practical implications
The findings shed light into the impact of oil price shocks on capital spending in relation to firm characteristics. The impulse response results that capital spending of the E&P, drilling and oil services firms, and the small firms in general, have a higher positive impact of oil shocks lend support to the argument that these firms more likely reduce capital spending because of financial constraints in the capital markets. A higher positive response by the low return on assets firms indicates that firms with low earnings and cash flow problems are more likely to reduce their capital spending when oil price drops. With regard to growth prospects, it appears that shocks in oil price dampen the outlook for the low p/e firms, which leads to a cut in their capital spending. On the other hand, the high p/e firms seem to rely more on their growth prospects and downplay the adverse impact of oil price shocks.
Originality/value
Unlike previous studies in this area, the study focuses on firm-level data in detail, uses quarterly data and uses firm-specific variables that explain impact of oil price shocks on capital spending in oil and gas industry.
Details
Keywords
The main purpose of this study is to investigate product price changes from the stockholders' perspective. Our evidence indicates that stockholders react positively to a price…
Abstract
The main purpose of this study is to investigate product price changes from the stockholders' perspective. Our evidence indicates that stockholders react positively to a price increase at the time of the Wall Street Journal announcement. In the event of a price cut, stockholders show little reaction. In a longer interval, however, both price increases and price cuts are associated with negative stock returns. Our analysis also suggests that firms that initiate price changes experience declining sales prior to the price change decisions.
Zahid Iqbal, Shekar Shetty, Joseph Haley and Maliyakkal Jayakumar
Terminations of overfunded pension plans may strengthen a financially‐weak firm. When manager's interests are aligned with shareholder's, either through high levels of stock…
Abstract
Terminations of overfunded pension plans may strengthen a financially‐weak firm. When manager's interests are aligned with shareholder's, either through high levels of stock ownership, or through labor and takeover market discipline at low levels of ownership, termination strengthens the firm and the stock price should react positively. In contrast, managers at middle levels of ownership hold enough stock to be entrenched, but not enough to be aligned with shareholder interests. Terminations may then be for reasons other than strengthening a financially‐weak firm and may not generate a positive stock price reaction. We find that the financial incentives for terminations differ significantly between terminators and nonterminators at high and low levels of managerial ownership, but not at intermediate levels. Our stock return analysis indicates that terminations by high and low ownership firms are consistent with shareholder welfare. Concern has been expressed that terminations of defined benefit pension plans transfer wealth from plan participants to plan sponsors. Plan terminations can have a value‐maximizing motive when the reversions are used as a source of financing, thereby helping firms avoid bankruptcy and liquidation. The empirical evidence (e.g., Alderson and VanDerhei (1992), VanDerhei (1987), and Hsieh, Ferris, and Chen (1990)) showing favorable stock price reactions to terminations by financially‐weak firms are consistent with the value‐maximizing justification for plan terminations. Prior studies (e.g., Agrawal and Mandelker (1987), Kim and Sorensen (1986), Sicherman and Pettway (1987), Hill and Snell (1989), Benston (1985), Morck, Shleifer, and Vishny (1988), Carter and Stover (1991) and Hermalin and Weisbach (1991)) have also documented that management's ownership interest in the firm has an important effect on the incentive to maximize firm value. This paper examines the effect of managerial ownership on financial termination. Specifically, we address whether or not financial motivation to terminate plans exists at all levels of managerial ownership. Our results suggest that the terminating firms, when compared to the nonterminating firms, are financially weak at high and low levels of managerial ownership. In contrast, there is no significant difference in financial weakness between the terminators and the nonterminators at the middle ownership levels. Also, stockholders reactions to terminations are higher at high and low levels of managerial ownership.
Shenggen Fan and Christopher Rue
The purpose of this paper is to set the stage for the proceeding articles with background of the impressive yet incomplete progress made in eliminating hunger and malnutrition in…
Abstract
Purpose
The purpose of this paper is to set the stage for the proceeding articles with background of the impressive yet incomplete progress made in eliminating hunger and malnutrition in China and India.
Design/methodology/approach
The paper provides background of the progress and challenges to achieving food security and nutrition in China and India. It then highlights the lessons learned from this special issue, and concludes with remaining knowledge gaps.
Findings
The paper summarizes findings from each article in the special issue.
Originality/value
Comparing the experiences of these two countries is essential to share knowledge and accelerate progress in eliminating poverty, hunger, and malnutrition both within these countries and globally.