OIL PRICE AND THE STOCK RETURNS: THE MODERATING ROLE OF FIRM SIZE

Abstract

This study aims to empirically investigate the impact of global oil prices on various firms at the Pakistan Stock Exchange (PSX). The study uses monthly data covering the period of January 2010 to December 2017 for 259 non-financial firms listed at the Pakistan Stock Exchange (PSX). Financial firms are excluded from the analysis due to their non-dependence on oil prices. The selected firms are categorized into small, medium, and large based on their market value of equity (market capitalization). Fixed effect (Least Square Dummy Variable) estimation technique is employed to estimate the econometric model chosen based on the Hausman specification test. Moreover, clustered sandwich estimators are used to deal with the heteroscedasticity and autocorrelation issues in the Least Square Dummy Variable (LSDV) model. Results show a statistically significant impact of oil price change, oil price volatility, and firm size on the individual firms' returns. Size of the firm and stock returns are positively associated, which provides sufficient evidence for the firm’s size effect. On the other hand, oil price and its volatility negatively impact the returns of the firms. The size moderated impact of oil price change and stock returns is positive but insignificant. However, there is evidence of a positive and significant size moderated role of oil price volatility in determining the stock returns. It is evident from the analysis that small and medium-sized firms are adversely impacted by the oil price volatility relative to their larger counterparts, and the impact is severe for smaller firms.