The effect of oil price volatility on strategic investment

In this paper, we investigate how oil price volatility affects the strategic investment decisions of a large panel of US firms. This paper uses key insights from the real options literature to develop a model of a company's strategic investment and shows how changes in oil price volatility can impact strategic investment decisions. The model is estimated using recently developed generalized method of moment estimation techniques for panel data sets. Empirical results are presented to show that there is a U shaped relationship between oil price volatility and firm investment. This is consistent with the predictions from the strategic growth options literature. The results should be useful to decision makers, investors, managers, policy makers and others who need to make strategic investment decisions in an uncertain world.

Research Highlights► There is a U shaped relationship between oil price volatility and firm investment. ► The U shaped relationship is robust to a number of different estimation techniques. ► Current period oil price volatility inflection points range from 32.45% to 33.60%.