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The Effect of Changes in the Percentage Depletion Allowance on Oil Firm Stock Prices

In this paper I examine the effect of changes in tax laws on the value of firm stock prices. The behavior of oil firm stock prices in 1969 (at the time of congressional votes to reduce the percentage depletion allowance) is studied to test the hypothesis that this legislation resulted in a decline in the value of oil firms. The empirical results show that statistically significant declines in the average value of oil frm stock prices did occur at the time of House and Senate committee votes. Cross-sectional tests show a significant correlation between the measured declines for individual firms and the expected declines predicted for those firms in the period surrounding one of the two committee votes.

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Energy Specializations: Petroleum – Policy and Regulation; Energy Investment and Finance – Corporate Strategy

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, Q35: Hydrocarbon Resources, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, Q21: Renewable Resources and Conservation: Demand and Supply; Prices

Keywords: Oil companies, Stock prices, Depletion allowance, Taxes

DOI: 10.5547/ISSN0195-6574-EJ-Vol10-No4-7

Published in Volume 10, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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