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Oil Price Uncertainty and M&A Activity

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This study examines the impact of oil price uncertainty on mergers and acquisition (M&A) activity in the oil and gas sector. Analyzing this industry enables us to construct a natural forward-looking measure of oil price uncertainty, namely the implied crude oil volatility. Using a sample of U.S. firms in the oil and gas sector from 1994-2018 containing 4,323 announced transactions, we document that oil price uncertainty is negatively related to future M&A activity. Uncertainty is mainly a driver of horizontal and vertical M&A activity, where upstream firms are more affected by this uncertainty than downstream firms. Our results lend support to a real options explanation of investment under uncertainty where firms choose to defer investments as a response to increased uncertainty.

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Keywords: Energy economics, M&A, Corporate investment, Implied crude oil volatility, Oil and gas sector, Oil price uncertainty

DOI: 10.5547/01956574.44.4.sbar

Published in Volume 44, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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