Oil shocks and corporate payouts

Abstract

This study uses a novel method of segregating oil price shocks into demand- and supply-driven contributors to examine their impact on the corporate payouts of US companies. Using a large sample of data comprising 106,753 to 115,853 observations over the 1985–2019 period, our firm fixed-effect regression estimates show that oil demand shocks substantially increase corporate payouts through greater share repurchases (but lower cash dividends), whereas oil supply shocks reduce payouts mainly through fewer share repurchases. Further analysis reveals that these effects are driven predominantly by non-oil producers (i.e., oil user groups) as oil shocks generally have no significant bearing on the corporate payouts of oil-producing firms (except cash dividend reductions during oil supply shocks). Our findings suggest that oil demand shocks, which signify economic growth, prompt non-oil industries to substitute cash dividends with stock repurchases to signal better future prospects. On the other hand, oil supply shocks induce uncertainty about future prospects, which prompts non-oil industries to reduce their corporate payouts. Overall, our findings contribute to the energy finance literature by revealing the role of differentiated oil shocks in explaining corporate payout policies.