Crude oil price volatility and environmental performance

Abstract

We study the relationship between crude oil price volatility and corporate environmental performance. Using an extensive dataset from 32 countries consisting of 18,464 firm-year observations, we provide strong evidence that oil price volatility significantly increases firms' environmental performance. Our main inference is robust when using alternative measures of oil price volatility and environmental performance, alternative econometric specifications and samples, and several approaches to control for endogeneity. In a set of additional analyses, we first conduct a difference-in-differences analysis that exploits the Arab Spring as an exogenous oil price volatility increase and document a stronger relationship between oil price volatility and environmental performance in the aftermath of the Arab Spring. We second identify (i) capital expenditures and (ii) alternative energy importation as two mechanisms through which oil price volatility influences environmental performance. We finally show that national culture plays a significant role in moderating the relationship between oil price volatility and environmental performance. Taken together, our empirical findings highlight the role of economic uncertainty in affecting firms’ environmental performance and provide significant contributions to management and policymakers.