Macro Uncertainties and Financial Dynamics of Renewable and Non-Renewable Resource Companies

Abstract

This thesis is comprised of three independent but thematically related papers. All three papers focus on how macro (economic and non-economic) uncertainties affect the financial dynamics of renewable and non-renewable resource companies from across the world. |||||

The first paper focuses on how macro uncertainties induce overinvestment across resource companies across 32 countries in the G20 area. Three analyses are conducted. The first analysis examines the pattern of overinvestment and finds that internal firm factors significantly determine firms' investment behaviour. Firms in the forestry and paper sector are found to overinvest during the sample period, while alternative energy firms tend to underinvest. Further testing also shows significant different firm investments before and after the 2007/8 financial crisis, confirming that a structural break happened during the crisis. This is particularly true for non-renewable firms. Macro uncertainties are found to be significant in explaining firm investment behaviour and inducing overinvestment of the sample firms. Lastly, the first paper finds that overinvesting has a positive influence on firms' future performance. |||||

The second paper focuses on how macro uncertainties influence financing behaviour of resource companies in 75 countries across the world. The analysis conducts testing of three prominent capital structure theories: (1) Static Trade-Off; (2) Pecking Order; and (3) Market Timing. The overall results show that there is no single theory prevails, although the pecking order and market timing theories have certain explanatory power on sample firms' financing behaviour. There are four analyses conducted. The first analysis tests the static trade-off theory and finds this theory cannot explain the sample firms' financing behaviour. The second analysis implements the leverage target adjustment framework and finds the pecking order as the leading theory. The third analysis finds a downward cyclical trend of the pecking order coefficients, with the lowest point being around the 2007/8 global financial crisis. The downward pattern of the pecking order coefficients shows that the pecking order theory holds strong only during the early period of the sample. The second paper's last analysis tests the market timing theory and finds that the theory holds strong, as indicated by the significance of macro condition (uncertainties) variables in determining sample firms' capital structure, although the main proxies of the cost of debt are not statistically significant. |||||

The third paper focuses on how macro uncertainties influence conditional capital shortfall across resource companies in 61 countries across the world. The paper examines the dynamics of capital surplus and shortfall of sample firms' conditional on an extreme economic event strike. Two extreme events are considered: (1) stock market crash; and (2) commodity price crash. The systemic risk (SRISK) index from Brownlees and Engle (2017) is adopted and modified for this purpose. The results show both events share a resemblance in influencing firm capital surplus and shortfall. The patterns also show that sample firms tend to have a capital shortfall trend before 2000, which turned to capital surplus trends. This change of pattern is owing to the commodity boom and careful capital structure adopted by the firms. This finding is particularly true for resource firms from developed countries, which dominate the sample in this study. Furthermore, the analysis also shows the vital role of commodity price, geopolitical and economic policy uncertainties in inducing capital shortfall. These uncertainties also significantly increase firms' failure probability. Lastly, the results show that the potential capital shortfall has a significantly positive relationship with market performance, indicating a high-risk high-return trade-off in the resource sector. Show more