The asymmetric impact of oil price demand and supply shocks on financial constraints

By separating aggregate oil price shocks into demand and supply components, we examine their effects on firm-level financial constraints using 60,925 firm-year observations from 2002 to 2021 across 65 countries globally. Controlling for year and firm fixed effects, we find that oil demand shocks are negatively related to firms’ financial constraints. In contrast, oil supply shocks dampen firms’ ability to obtain external financing. Additional analysis reveals that the impact of oil price shocks on financial constraints is more pronounced for firms belonging to the oil industry, oil users, oil-related and non-oil substitute subsectors, and for firms in non-oil-exporting and oil-consumer countries. We further observe that competitive industries and high market liquidity exacerbate the impact of oil price shocks on financial constraints. Our mechanism tests show that profitability and investment decrease (increase), while production costs, sales volatility and cash flow volatility increase (decrease) in response to oil price supply (demand) shocks, all of which are signs of firms experiencing binding (unbinding) financial constraints. Our main findings are robust to various modelling techniques and measures of financial constraints.