Oil Price Volatility, an Economic Determinant of Earnings Volatility - Empirical Analysis on Earnings Volatility of U.S. Oil and Gas Companies Between 1986-2016
This study examines whether oil price volatility, an economic determinant, has significant correla-tion with earnings volatility in the U.S. oil and gas companies. The study also explores whether earnings volatility has increased in the very industry for the last thirty years. Differences among sub groups within the industry are studied to add precision to the analysis.
The study applies pooled data OLS regression to explore the relation between oil price volatility and earnings volatility. The observation sample is collected from Compustat database in WRDS from 1986 to 2016.
Findings suggest that oil price volatility has positive relation with earnings volatility and cash flow of operations. Earnings volatility for the time frame from 2002 to 2016 is greater than before 2002 for the whole industry. The level of earnings volatility is larger for oil and gas producers(SIC1311) than for refineries(SIC2911) for both time periods. However, increasing degree of association be-tween the two variables is observed only for oil and gas producers(SIC1311).
The study concludes that oil price volatility provides incremental information connected to earn-ings volatility associated risk in the U.S. oil and gas industry. Especially oil and gas producers were found significantly affected by oil price volatility in terms of earnings volatility
