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Impact of Energy Price on Firm Performance and Stock Price

Introduction

The requirement in India is fulfilled significantly by coal (44%) and oil (34%) as per energy
Outlook Report 2015. As per this report, 70 % power generation are domestic. The population of
India is 18% of the world where as it consumes only 8% of primary energy of the world. From
these statistics, it is very well understood the future energy requirement in the India. As the
conventional energy is limited and prices are volatile, price of energy has the potential to
influence the financial market and financial performance of firms.

The objective of this study is to find the predictability of stock price and firm profitability. This
research proposal also aims efficiency to understand the efficiency of crude oil price to influence
the stock price and firm’s performance.

Contribution: It will help the investor to take a decision. It will also help the portfolio manager to
generate a good return on the portfolio.

Literature Review

Lee and Lee (2018) find that oil price affects the negatively the performance of the banks. They
did the study in the context of China. To measure the performance of the bank, the researchers
had taken the variables such as Capital adequacy, Asset quality, Management, Earnings, and
Liquidity. Though stable economic environment is helpful to reduce the adverse effect of oil
price volatility. Gupta (2017) finds the market reacts positively towards the alternative energy
firms. The author considers the stock return, riskiness, illiquidity, market capitalization, price -to-
book value ratio and leverage as the proxy of financial performance.

Degiannakis, Filis and Kizys (2014) have tried to explain the volatility in stock return by using
oil price shocks oil price (oil supply shock, aggregate demand shock and oil specific demand
shock). They tried to measure three volatility conditional volatility, realized volatility and
implied volatility. They find that only the aggregate demand shock has an influence on the stock
return volatility. Cong, Wei, Jiao and Fan (2008) find an increase in oil volatility causes
speculations activities in mining index and petrochemicals index. They don’t find any impact of
oil price on Chinese stock market indices except manufacturing indices. Sadorsky (2008)
discovers the effect of oil price exists on all firms irrespective of firm size, especially its effect is
stronger in case of medium sized firms. Zhang (2017) tried to find to what extent the oil price
shock is explaining the stock prices. For this purpose, he finds that the impact of an oil shock is
occasional. Rolling window analysis was used for this study. You, Guo, Zhu & Tang (2017) find
that there is a significant effect of an oil price shock on stock return. The data of 14 industries in
China were taken into consideration. But, the impact on each industry has not been observed in
the study.

Research Gap

In a particular strand of literature, Lee and Lee (2018) and Gupta (2017) studied the impact of oil
price on the financial institutions and energy firm. Impact of crude oil price on financial of firms
of other industries needs to be studied. There are many studies on the impact of oil price on stock
price and stock return (Degiannakis, Filis and Kizys, 2014; Cong, Wei, Jiao and Fan, 2008;
Zhang, 2017; You, Guo, Zhu & Tang, 2017), but industry wise study has not been done. On the
other hand, it will be interesting to find where the oil price is more influential whether the
performance of firm or stock price.

Objective:

To find the impact of crude oil price on the financial performance of firms

To find the impact of crude oil price on the stock price of different industry

To make a comparative analysis of above two cases to find where the oil price has more impact.

Methodology and Data:

Data Source: CMIE and NSE

Methodology:

Stock return, riskiness, illiquidity, market capitalization, price -to-book value ratio and leverage
can be considered as the proxy of financial performance (Gupta, 2017). On other hand, Rolling
window analysis can be applied to measure the impact of oil price on stock price (Zhang, 2017).
Cong, R. G., Wei, Y. M., Jiao, J. L., & Fan, Y. (2008). Relationships between oil price shocks and
stock market: An empirical analysis from China. Energy Policy, 36(9), 3544-3553.

Degiannakis, S., Filis, G., & Kizys, R. (2014). The effects of oil price shocks on stock market
volatility: Evidence from European data. The Energy Journal, 35-56.

Gupta, K. (2017). Do economic and societal factors influence the financial performance of
alternative energy firms?. Energy Economics, 65, 172-182.

Lee, C. C., & Lee, C. C. (2018). Oil price shocks and Chinese banking performance: Do country
risks matter? Energy Economics

Sadorsky, P. (2008). Assessing the impact of oil prices on firms of different sizes: Its tough being
in the middle. Energy Policy, 36(10), 3854-3861

You, W., Guo, Y., Zhu, H., & Tang, Y. (2017). Oil price shocks, economic policy uncertainty and
industry stock returns in China: Asymmetric effects with quantile regression. Energy
Economics, 68, 1-18.

Zhang, D. (2017). Oil shocks and stock markets revisited: Measuring connectedness from a
global perspective. Energy Economics, 62, 323-333.