IDEAS home Printed from https://ideas.repec.org/a/bla/sysdyn/v36y2020i1p74-100.html
   My bibliography  Save this article

How do oil prices and investments impact the dynamics of firm value?

Author

Listed:
  • Aima Khan
  • Muhammad Azeem Qureshi
  • Pål Ingebrigt Davidsen

Abstract

The purpose of this study is twofold: (i) to analyze the impact of investment policy decision on the firm value given the uncertain oil and gas prices and (ii) to propose policies that enhance firm value. The study develops a system dynamics model that integrates the financial and operational activities of oil firms. The simulation results reveal that, when oil and gas prices increase, positive future expectations lead to increased investments and reduced cash flows. Greater volume of investments over the firm's current investment policy decreases its future cash flows and the total firm value over the first 20 years of the simulation period; it increases thereafter. To support higher investments, the firm would issue a higher number of shares, and consequently the market price per share would be lower, and vice versa. The simulation results suggest a relatively lower volume of investments to increase the market price per share. © 2020 The Authors. System Dynamics Review published by John Wiley & Sons Ltd on behalf of System Dynamics Society

Suggested Citation

  • Aima Khan & Muhammad Azeem Qureshi & Pål Ingebrigt Davidsen, 2020. "How do oil prices and investments impact the dynamics of firm value?," System Dynamics Review, System Dynamics Society, vol. 36(1), pages 74-100, January.
    • Handle: RePEc:bla:sysdyn:v:36:y:2020:i:1:p:74-100
    DOI: 10.1002/sdr.1649
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/sdr.1649
    Download Restriction: no
    File URL: https://libkey.io/10.1002/sdr.1649?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Nur Triani & Deden Tarmidi, 2019. "Firm Value: Impact of Investment Decisions, Funding Decisions and Dividend Policies," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(2), pages 158-163, April.
    2. Edward B. Roberts & Dan I. Abrams & Henry B. Weil, 1968. "A Systems Study of Policy Formulation in a Vertically-Integrated Firm," Management Science, INFORMS, vol. 14(12), pages 674-694, August.
    3. Jianzhong Xiao & Jinhua Cheng & Jun Shen & Xiaolin Wang, 2017. "A System Dynamics Analysis of Investment, Technology and Policy that Affect Natural Gas Exploration and Exploitation in China," Energies, MDPI, vol. 10(2), pages 1-19, January.
    4. Stefan Groesser & Niklas Jovy, 2016. "Business model analysis using computational modeling: a strategy tool for exploration and decision-making," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 27(1), pages 61-88, February.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    6. Jeffrey J. Quirin & Kevin T. Berry & David O'Brien, 2000. "A Fundamental Analysis Approach to Oil and Gas Firm Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(7&8), pages 785-820.
    7. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 495-525.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Carmine Bianchi & Federico Cosenz & Milica Marinković, 2015. "Designing dynamic performance management systems to foster SME competitiveness according to a sustainable development perspective: empirical evidences from a case-study," International Journal of Business Performance Management, Inderscience Enterprises Ltd, vol. 16(1), pages 84-108.
    10. Muhammad Azeem Qureshi & Matteo Pedercini, 2010. "A Resource-Based Approach to the Modeling and Simulation of Income Distribution: The Case of Pakistan," Journal of Income Distribution, Ad libros publications inc., vol. 19(3-4), pages 65-87, September.
    11. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, September.
    12. Qudrat-Ullah, Hassan & Seong, Baek Seo, 2010. "How to do structural validity of a system dynamics type simulation model: The case of an energy policy model," Energy Policy, Elsevier, vol. 38(5), pages 2216-2224, May.
    13. Shibata, Takashi & Nishihara, Michi, 2011. "Interactions between investment timing and management effort under asymmetric information: Costs and benefits of privatized firms," European Journal of Operational Research, Elsevier, vol. 215(3), pages 688-696, December.
    14. Robyn McLaughlin & Assem Safieddine, 2008. "Regulation and information asymmetry," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 16(1), pages 59-76, February.
    15. Rajesh Kumar Bhaskaran & Sujit K Sukumaran, 2016. "An empirical study on the valuation of oil companies," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 40(1), pages 91-108, March.
    16. Kee H. Chung & Jang-Chul Kim & Young Sang Kim & Hao Zhang, 2015. "Information Asymmetry and Corporate Cash Holdings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(9-10), pages 1341-1377, November.
    17. Morellec, Erwan & Schürhoff, Norman, 2011. "Corporate investment and financing under asymmetric information," Journal of Financial Economics, Elsevier, vol. 99(2), pages 262-288, February.
    18. Stefan N. Groesser & Niklas Jovy, 2016. "Business model analysis using computational modeling: a strategy tool for exploration and decision-making," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 27(1), pages 61-88, February.
    19. Esther Del Brio & Alberto De Miguel & Julio Pindado, 2003. "Investment and firm value: an analysis using panel data," Applied Financial Economics, Taylor & Francis Journals, vol. 13(12), pages 913-923.
    20. Federico Cosenz & Guido Noto, 2016. "Applying System Dynamics Modelling to Strategic Management: A Literature Review," Systems Research and Behavioral Science, Wiley Blackwell, vol. 33(6), pages 703-741, November.
    21. Jeffrey J. Quirin & Kevin T. Berry & David O’Brien, 2000. "A Fundamental Analysis Approach to Oil and Gas Firm Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(7‐8), pages 785-820, September.
    22. Ivanovski, Zoran & Ivanovska, Nadica & Narasanov, Zoran, 2014. "Fundamental Analysis And Discounted Free Cash Flow Valuation Of Stocks At Macedonian Stock Exchange," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 5(1), pages 11-24.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Federico Cosenz & Vinicius Picanço Rodrigues & Francesco Rosati, 2020. "Dynamic business modeling for sustainability: Exploring a system dynamics perspective to develop sustainable business models," Business Strategy and the Environment, Wiley Blackwell, vol. 29(2), pages 651-664, February.
    2. Henriques, Irene & Sadorsky, Perry, 2011. "The effect of oil price volatility on strategic investment," Energy Economics, Elsevier, vol. 33(1), pages 79-87, January.
    3. Lyandres, Evgeny & Zhdanov, Alexei, 2014. "Convertible debt and investment timing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 21-37.
    4. Griffin, Paul A. & Jaffe, Amy Myers & Lont, David H. & Dominguez-Faus, Rosa, 2015. "Science and the stock market: Investors' recognition of unburnable carbon," Energy Economics, Elsevier, vol. 52(PA), pages 1-12.
    5. Zormpas, Dimitrios, 2020. "Investments under vertical relations and agency conflicts: A real options approach," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 273-287.
    6. Eunchun Park & Hojeong Park, 2014. "Real Options Analysis of Oil and Gas Resource Development for Independent E&P Firms in the North America," Korean Economic Review, Korean Economic Association, vol. 30, pages 349-367.
    7. Nishihara, Michi & Shibata, Takashi, 2018. "Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 118-137.
    8. Phan, Dinh Hoang Bach & Tran, Vuong Thao & Tee, Chwee Ming & Nguyen, Dat Thanh, 2021. "Oil price uncertainty, CSR and institutional quality: A cross-country evidence," Energy Economics, Elsevier, vol. 100(C).
    9. Sabet, Amir H. & Heaney, Richard, 2016. "An event study analysis of oil and gas firm acreage and reserve acquisitions," Energy Economics, Elsevier, vol. 57(C), pages 215-227.
    10. Shibata, Takashi & Nishihara, Michi, 2015. "Investment timing, debt structure, and financing constraints," European Journal of Operational Research, Elsevier, vol. 241(2), pages 513-526.
    11. Cosenz, Federico & Bivona, Enzo, 2021. "Fostering growth patterns of SMEs through business model innovation. A tailored dynamic business modelling approach," Journal of Business Research, Elsevier, vol. 130(C), pages 658-669.
    12. Banerjee, Shantanu & Güçbilmez, Ufuk & Pawlina, Grzegorz, 2014. "Optimal exercise of jointly held real options: A Nash bargaining approach with value diversion," European Journal of Operational Research, Elsevier, vol. 239(2), pages 565-578.
    13. Quader, Syed Manzur, 2023. "The interplay between uncertainty, managerial decision making, and firm value: Evidence from Bangladesh," Journal of Economics and Business, Elsevier, vol. 123(C).
    14. Bradley Blaylock & Bradley P. Lawson & Michael A. Mayberry, 2020. "Taxable income, future profitability, and stock returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 858-881, July.
    15. Yang, Baochen & An, Haokai & Song, Xinyu, 2024. "Oil price uncertainty and corporate inefficient investment: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    16. Agliardi, Elettra & Andergassen, Rainer, 2009. "Last resort gambles, risky debt and liquidation policy," Review of Financial Economics, Elsevier, vol. 18(3), pages 142-155, August.
    17. Lukas, Elmar & Mölls, Sascha & Welling, Andreas, 2016. "Venture capital, staged financing and optimal funding policies under uncertainty," European Journal of Operational Research, Elsevier, vol. 250(1), pages 305-313.
    18. Erwan Morellec & Boris Nikolov & Norman Schürhoff, 2018. "Agency Conflicts around the World," The Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4232-4287.
    19. Gérard Gaudet & Pierre Lasserre & Ngo Van Long, 1995. "Real Investment Decisions Under Information Constraints," CIRANO Working Papers 95s-33, CIRANO.
    20. Yang, Zhaojun & Zhang, Chunhong, 2015. "Two new equity default swaps with idiosyncratic risk," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 254-273.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:sysdyn:v:36:y:2020:i:1:p:74-100. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/0883-7066 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.