Oil Prices, Earnings, and Stock Returns

• In Event: Pricing Growth and Innovation

Abstract

A firm’s sales and expenses, on average, increase with oil prices. On balance, a firm’s earnings decrease with oil prices. The sensitivity of a firm’s financials to oil prices varies significantly across states, industries, and time. Furthermore, the market appears to react more (by about 13%) to earnings growth that is associated with oil prices relative to earnings growth that is not associated with oil prices. This effect is greater (i) when company sales (expenses) are less (more) sensitive to oil prices, (ii) when oil prices are higher and less volatile, (iii) when discount rates are lower, and (iv) when equity market hype and uncertainty are higher. Returns analysis indicates that the market overreacts to oil-related earnings growth, but correctly reacts to the remaining growth related to the company’s fundamentals.

Authors

• Steven Crawford, University of Houston-Houston

• Garen Bedros Markarian, WHU-Koblenz

• Volkan Muslu, University of Houston

• Richard A Price, Utah State University