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Oil uncertainty and firms' risk-taking

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  • Yin, Libo
  • Lu, Man

Abstract

Motivated by the limited evidence for a relationship between oil uncertainty and firms' risk-taking in China, we investigate how oil uncertainty (as proxied by the oil volatility risk premium) impacts firms' risk-taking and explain the mechanism. To highlight firms' expectations, growth opportunities, and ability to process new information, we use three proxies for firms' risk-taking (the implied cost of capital, the idiosyncratic volatility and the idiosyncratic skewness). Our empirical results show that oil uncertainty increases firms' risk-taking through the channel of risk compensation or real options related to firms' growth opportunities rather than risk-aversion. Oil uncertainty has a positive effect on firms' risk-taking proxied by the implied cost of capital and the idiosyncratic volatility but a negative effect on firms' risk-taking proxied by the idiosyncratic skewness related to contract options. Various variables involved in ownership, operating leverage and industrial conditions interact with oil uncertainty to affect firms' risk-taking through different channels. Our findings contribute to a greater understanding of the uncertainty in crude oil markets and firms' risk-taking behavior.

Suggested Citation

  • Yin, Libo & Lu, Man, 2022. "Oil uncertainty and firms' risk-taking," Energy Economics, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:eneeco:v:108:y:2022:i:c:s0140988322001025
    DOI: 10.1016/j.eneco.2022.105922
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