Economic Growth, Investment and Asset Pricing: Empirical Evidence

Drawing upon economic development under uncertainty, this thesis investigates some channels of nations' prosperity in three different but related topics. First, in chapter 2, panel data for 130 countries from 1981 to 2009 are employed to scrutinize the impact of multiple forms of human capital and energy consumption on per capita GDP growth. With the application of an expanded neoclassical growth model, the individual effects of primary, secondary and tertiary education enrolment ratios as well as average years of schooling is studied. In addition, the effect of health variables (such as life expectancy and the infant mortality rate) on GDP per capita growth is examined. The education and health variables have a significant effect on economic growth with the secondary enrolment ratio being the most effective. Energy has long been argued as an essential factor for the development of the economy and it should be in line with other production factors of neoclassical economics, capital (K) and labour (L). Energy consumption is found to support higher growth. Exploring the differential effect for the developed and oil-exporting countries, the education variables are found to have no differential impact in the oil exporting countries nor the developed countries, however, health human capital affects the growth of the developed countries differently. Energy consumption per capita has a significant positive effect in both types of countries. Second, crude oil price behaviour has become more volatile since 1973 which has a significant impact on major macroeconomic variables such as GDP, inflation and productivity. Studies considering the effects of oil price changes on decisions at the firm level are comparatively few. Oil price volatility represents a source of uncertainty affecting the cost of an important input, oil, which creates uncertainty regarding firm profitability, valuations and investment decisions. Chapter 3 builds on related strands in the literature that focus on investment decisions by firms. Investment theory is combined with modern econometric approaches to examine the effects of industry uncertainty and market instability on total investment expenditures in the UK firms. Generalized method of moments estimation techniques are applied to a panel data set that covers 2694 non-financial firms and 416 financial firms from Worldscope DataStream over the period 1986-2011. Tobin’s Q theory which connects investment to the ratio Q is applied to estimate the investment model that is augmented with measures for both macroeconomic and industry specific uncertainty; specifically this is done by including stock market and oil price volatility in the model. Stock price uncertainty seems to be positively related to investment among the companies in both samples. On the other hand, empirical results are presented to show that there is a U shaped relationship between oil price volatility and firm investment. The results should be useful to decision makers, investors, managers and policy makers who need to make investment decisions in an uncertain world. Third, recent empirical research has found evidence of a relationship between changes in oil price and stock prices. Most published papers investigate the relationship between oil price movements and stock prices using either economy-wide measures of stock prices or industry sector measures of stock prices. The aim of Chapter 4 is to scrutinize the responses of some of the UK transportation, travel and leisure, and oil and gas firms to oil price changes. Fama-French-Carhart's (1997) four-factor asset pricing model is augmented with the oil price risk factor to study the association of oil and stock prices of 25 firms over the period from January 1998 to December 2012. The extent of the exposure of UK transportation and travel and leisure firms is generally negative but it is particularly significant for a number of firms including delivery services, travel and tourism, and airlines. Oil price risk exposures of UK oil and gas companies are generally positive and significant. With the aid of asymmetric and scaled specifications, some firms show strong evidence of asymmetry in the reaction of stock returns to changes in the price of oil comprising travel and tourism, airlines, and integrated oil and gas. Moreover, the results document that oil price risk exposures vary over time. In particular, the global recession of 2008 has significantly contributed to the oil price risk exposure of travel and tourism and integrated oil and gas firms. These results should be of interest to financial analysts, corporate executives, regulators and policy makers.