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Oil Prices, Earnings and Stock Returns
Co-authored by Richard Price (Steed School of Accounting, Price College of Business, University of Oklahoma), Steve Crawford (University of Houston), Garen Markarian (Otto Beisheim School of Management, WHU), Volkan Muslu (University of Houston) (Review of Accounting Studies, 2020)
Oil prices have swung dramatically in recent years, increasing interest in the relation between oil price changes and economic activity. A natural question stemming from this interest concerns the link between oil price changes and company earnings and value.
The authors explore the impact of oil prices on corporate earnings, then explore how the capital market reprices company equity shares in response to surprises in oil-related earnings. They document that revenues and expenses are both positively related to oil price changes across industries, but on average both changes in revenues and expenses largely offset each other and do not significantly impact earnings.
However, for certain industries, the impact on oil price changes is very large. For example, the revenues of royalty traders are very sensitive to oil price changes, but expenses are not. The authors separate earnings into the part which is oil-related and the part which is not oil-related. They find that the capital market reacts more strongly to oil-related earnings surprises, particularly for firms classified as oil consumers, in contrast to non-oil-related earnings surprises.
Overall, the authors have shown convincingly how surprise oil price changes impact stock price changes through accounting earnings.
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