Title: Effect of the 2016 OPEC production cut announcement on the default likelihood of the oil industry and commercial banks

Authors: Kenneth J. Hunsader; Kyre Dane Lahtinen; Chris M. Lawrey

Addresses: Department of Economics and Finance, The University of South Alabama, Mobile, Alabama, USA ' Department of Finance and Financial Services, Wright State University, Dayton, OH, USA ' Department of Economics and Finance, Mitchell College of Business, 5811, USA Drive South, USA; University of South Alabama, 36688, USA

Abstract: Using option pricing methodology, we provide evidence the oil and banking industries' default likelihood decreased following OPEC's November 2016 oil production cut announcement. The effect is present within several oil sub-industries and for the banks conducting business in states with the most oil production. In addition, for the oil industry we find the decrease in default likelihood is more pronounced for firms with higher leverage, low financial slack, small market value, and small book-to-market ratios. For commercial banks, banks with higher non-performing assets and provision for loan losses experienced a greater decline in default likelihood. In addition, similar to the oil industry, size and book-to-market are significant determinants of the change in default likelihood.

Keywords: market efficiency; event study; financial institutions; financial distress; energy.

DOI: 10.1504/AJFA.2021.117216

American Journal of Finance and Accounting, 2021 Vol.6 No.3/4, pp.297 - 313

Received: 30 Jan 2021
Accepted: 27 Apr 2021
Published online: 23 Aug 2021 *