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Price uncertainty and corporate value
Institution:1. INSEAD, Asia Campus, 1 Ayer Rajah Avenue, 138676 Singapore, Singapore;2. Stanford University, Graduate School of Business, Knight Management Center, 655 Knight Way, Stanford, CA 94305, United States;3. Harvard Business School, Soldiers Field, Boston, MA 02163, United States;1. Department of Accounting, Finance, and Economics, College of Business Administration, Tarleton State University, 1333 W. Washington Street, Stephenville, TX 76402, United States;2. Department of Finance, College of Business, East Carolina University, East 5th Street, Greenville, NC 28757, United States;3. Andreas School of Business, Barry University, 11300 NE 2nd Avenue, Miami Shores, FL 33161, United States;1. School of Finance, Central University of Finance and Economics, China;2. School of Economics and Business Administration, Chongqing University, China
Abstract:This study examines the sensitivity of equity values of oil producers to changes in the uncertainty of future oil prices. We document that this sensitivity is negatively correlated with a firm's debt ratio and its production costs. These results indicate that companies that are more likely to experience financial distress or underinvestment from low cash flows are adversely affected by increases in the uncertainty of future cash flows. We conclude that corporate risk management can increase shareholder value by reducing the expected costs of financial distress and underinvestment.
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