Oil price shocks, firm uncertainty and investment

The intuition in this paper is that an oil price shock has a greater effect on delaying a firm's investment the greater the uncertainty faced by that firm. A rise in the composite variable of oil price shock and firm uncertainty significantly delays investment. While growth in real oil price is not significant, the time-varying individual firm's stock price volatility identified with oil price shock dates is highly significant. Among 12 measures, the uncertainty measure obtained by multiplying an indicator function, that takes 1 if Hamilton (1996) type oil price shock is greater than 0 and 0 otherwise, to a firm's stock price volatility provides the largest absolute t-values in investment equations. A rise in firm uncertainty decreases both short- and long-run firm investment, indicating that oil price shocks affect the U.S. economy because they identify important geopolitical or economic events that have significant implications for the future U.S. economy.