The Empirical Research Hypotheses

Every researcher has their own hypothesis, or the research hypothesis could be very close to other authors, the only differences could be the research objective or time period. Therefore, it is important to distinguish and create our empirical research hypothesis. The hypothesis should help to answer the main question: How financial variables and oil prices impact Norwegian oil companies’

stock prices? Therefore, this chapter presents the hypotheses for research. First three hypotheses present an analysis of the oil price and stock price relationship and last seven hypotheses present an analysis of the financial variable and stock price relationship.

The approval or denial of the first hypothesis is intended to distinguish a positive relationship between oil price and stock price or in other words:

Hypothesis 1: There is a strong positive relationship between oil price and stock price.

Intuitively, the oil business is very strongly impacted by the price of oil, because the price of oil is the main driver for success in business, but companies cannot control the price, especially small companies and especially when Norway do not belong to OPEC. Moreover, all companies related to oil base their investments on oil price, and when the oil falls by half like in 2015, the companies will experience big losses due to misleading information about high oil prices. The scientific literature raises the same hypothesis: the oil price leads to higher returns for oil companies. For example, oil price growth leads to higher expectations about cash flow from oil-related companies and that in turn increases expectations from investors about oil-related companies (Abhyankar, Xu, Wang, 2013).

Moreover, usually oil industry companies pay dividends to investors, hence an oil price increase creates expectations about higher dividends due to higher profitability from the rise in the oil price (Abhyankar, Xu, Wang, 2013). Therefore, the relationship should be positive to Norwegian oil companies, although our analyzed companies are from different sectors of the industry, so oil companies might not have the same positive relationship with oil price as other sectors in the same industry. This hypothesis is approved if there is a positive relationship and the coefficients are statistically significant at 0.01, 0.05, 0.1 levels of confidence.

The second hypothesis is related to OPEC and that the organization has a statistically significant impact on the stock price of oil companies:

Hypothesis 2: OPEC has an impact on the stock price of oil companies.

First of all, the relationship between OPEC and stock price should be indirect. For example, if the organization lowers supply than the oil price should increase if demand remains constant. A positive impact on oil price should increase stock price of oil-related companies. However, Norway is not in OPEC and the impact could lag between OPEC decisions and stock returns on oil-related companies. Giudi (2006) analyzes two markets (US and UK) in search of relationships with OPEC decisions: OPEC has positive impact in general on the US market and the UK market is impacted negatively by OPEC countries’ decision on increasing oil production volume. But we didn’t find information regarding how the stock price of oil-related companies are impacted by OPEC decisions.

Therefore, it is important to investigate whether there exists a relationship between OPEC decisions and stock price, or whether the relationship is statistically insignificant. This hypothesis is accepted if there is positive relationship and the coefficients are statistically significant at 0.01, 0.05, 0.1 levels of confidence.

The third hypothesis, like second, is strongly related to the price of oil. The third hypothesis relates to the dollar and euro exchange rate and stock price of oil companies:

Hypothesis 3: The relationship between the dollar/euro exchange rate and stock price is negative.

The relationship between the exchange rate and oil price is very popular among authors who study the interaction of economy and business. There are not many research papers about the relationship between the exchange rate and stock price in the context of oil-related companies. More researchers focus on analyzing how the dollar, or other currencies, can impact the oil price. Yan (2012) concludes that in the short run, an appreciation of 1 percent of the dollar decreases the international oil price by 1.82 percent. Therefore, we assume that if the relationship between the oil price and stock of oil companies is positive, then dollar rate appreciation will have negative impact on stock returns of oil companies. The author believes that one of the reasons why there exists correlation between the two previously mentioned variables is because the dollar is used by oil companies in international oil price market. Hence, the correlation between the dollar exchange rate and stock returns should be negative. The third hypothesis should be accepted if the coefficient has negative value and coefficient is statistically significant at 0.01, 0.05, 0.1 levels of confidence.

The final seven hypotheses will be related to companies’ financial variables (ratios) and stock price. The first hypothesis relates to the relationship between financial ratios and oil companies’ stock price expressed in the context of liquidity:

Hypothesis 4: There exists a positive relationship between the liquidity position of energy firms and value creation in the market

The liquidity ratios such as cash ratio, current ratio, and others show how oil companies are able to operate in day-to-day operations. High liquidity benchmark of oil companies shows investors that they are able to operate well on a daily basis. On the other hand, a high liquidity ratio shows that companies have too much money and they don’t have any opportunities to invest, thus an investor would not invest his or her money in that stock. Bhaskaran and Sukumaran (2016) conclude that current ratio, cash ratio, and quick ratio were significant at a 10 per cent level and positively impacts the average share price of 82 oil companies. Therefore, there is some proof that liquidity ratios have a relation to stock price, hence the hypothesis is accepted if the significant value is lower than 1, 5, 10 percent level and coefficient is positive to the dependent variable.

The fifth hypothesis relates to dividend payment policy and stock price:

Hypothesis 5: Companies can have a positive impact on their own stock price by paying dividends Some financial experts believe that one of the most important variables of oil companies for investors is their dividend policy. In other words, dividend payments for investors is beneficial because the payment to investors creates extra profit from holding the stocks in which he invests.

Paying dividends is especially important in the oil industry, as companies often cannot grow as quickly as those in other industries, for example technology. They may also have reached their maximum potential in the oil industry, thus paying a dividend is an ideal way to provide their investors an above-market return. Bhaskaran and Sukumaran (2016) would agree with previous statement because they concluded that the dividend payment variable has a positive impact on stock price and is an important variable in the valuation of energy companies. Therefore, we would be interested to see if the same conclusion can be drawn if companies not only produce oil, but also carry out other operations which help to creates extra value for the oil industry, and if the coefficient is significant and positive, then hypothesis will be accepted.

The sixth hypothesis is created on the principal that profitability ratios impacts positively stock return on oil companies:

Hypothesis 6: Higher profitability leads to higher stock returns

Profitability for companies is a very important tool for future growth and shareholder returns, especially as negative profitability leads companies to bankruptcy. Moreover, the profit represents the results of a company’s financial year and the positive growth of profit increases dividend payments for its investors, so a positive profitability rate should increase stock price. On the other hand, Mohan (2006) argues that the relationship between stock price and profitability rates are irrelevant. But Bhaskaran and Sukumaran (2016) disagree with aforementioned author and in fact they believe that profitability and growth rates are the most important determinants in a firm’s value.

Moreover, Behaskaran and Sukumaran’s results (2016) show that profitability rates such as ROE, ROCE and ROA leads to a higher stock price in oil-related companies. Therefore, the hypothesis will

be accepted if the coefficient is positive and the significance value is equal to or lower than 1, 5, 10 percent.

The seventh hypothesis, which is related to financial variables, represents positive correlation between efficiency variables and stock price:

Hypothesis 7: The relationship between efficiency variables and stock returns is positive

The efficiency ratios help to determine a company’s capability to manage cost and time.

Lower efficiency creates bigger costs and consumes more time, which in the end creates even bigger costs or can even create liquidity problems. Hence, an investor would likely not invest in those companies which are inefficient compared with other companies, or those who have such low efficiency that the company’s financial statements show losses. Behaskaran and Sukumaran (2016) concluded that efficiency rates lead to a higher stock price for oil-related firms. Therefore, this hypothesis can be confirmed if the significant value of coefficient is lower than 1, 5, 10 percent and the coefficient is positive.

The eighth hypothesis is related to market value and stock price of oil industry companies.

This hypothesis shows positive correlation between market value and stock price:

Hypothesis 8: The increase of market value ratios increases the stock price returns

The market value ratios are one the most important factors for investors and even for companies who are planning to buy companies, as well as for analytics when they want to know a company’s share price in the market. Overvalue ratios show that company’s stock price is too high, and it is better to invest when market value is low. On other hand, Haque (2013) argues that the stock price of oil-related firms has been impacted by performance market value. Therefore, the hypothesis accepted will be if the significant value will be lower than 1, 5, 10 percent and the coefficient is positive.

The ninth hypothesis is related to the relationship between stock price and capital expenditure:

Hypothesis 9: There exists a positive relationship between capital expenditures and stock price.

A company’s managers who want to create successful business, need to focus on three areas:

investment, dividend policy and financial decisions. We will discuss investment decisions. Bhaskaran and Sukumaran (2016) conclude that capital expenditures have a positive impact on stock price.

Wachanga (2003) explains that there are two types of investment which helps to maintain and increase stock price. The first type of expenditure increases the volume of a company’s operations (Wachanga, 2003). The second investment type relates to expenditures with regard to maintaining existing assets.

With these investments companies should increase their profits in the future and that should increase stock price. Moreover, capital expenditures are very important for oil companies for maintaining successful businesses. Therefore, the hypothesis accepted will be if the significant value will be lower than 5 percent and the coefficient is positive.

The tenth hypothesis should present overall companies performance:

Hypothesis 10: Enterprise value positively impacts stock price of oil-related companies.

The overall value of any company should be important for investors, especially for investors who are thinking of buying a whole oil company. Even for small investors, the enterprise value would be at least as important as profitability rates (Bhaskaran and Sukumaran, 2016). In other words, the small investor would prefer to have the knowledge to compute a company’s enterprise value and compare that figure with other oil companies. The value should represent a company’s efficiency, profitability, liquidity, financial leverage and other factors related to financial performance. Hence, enterprise value should correlate with other previously mentioned ratios and should positively impact oil companies’ stock prices. Although based on Bhaskaran and Sukumaran’s (2016) conclusions it can be surmised that the ratio between enterprise value and cashflows have a negative impact on stock price. However, based on Howard and Harp’s (2009) conclusions, enterprise value has positive impact on stock price. Therefore, it is important to find out whether or not enterprise value has positive impact on stock price. Hence, the hypothesis accepted will be if the significant value is lower than 1, 5, 10 percent and the coefficient is positive.