Carbon emissions, fracking, and firm value of U.S. oil and gas firms

Abstract

We examine in this paper how firm value (market-to-book ratio, MTB) of U.S. oil and gas sector firms from 2010 to 2020 responds to carbon emissions intensity measures. We investigate three measures comprising total carbon emissions relative to assets, to market value of equity, and to net property, plant, and equipment. Our dynamic panel data approach separates the 82 firms into 35 fracking and 47 non-fracking companies to address features underlying firm financing during the shale oil revolution. Concerned investors about the companies' large carbon emissions may have pulled out of the sector. These companies may also have overleveraged when expanding into new technologies of oil production or kept larger cash flow ratios. We report lower average carbon emissions for fracking firms, together with the larger size of fracking techniques: mean of assets of $46 billion for fracking versus $12 billion for non-fracking companies. Using fixed-effects and system generalized methods of moments (SGMM) models, we find that carbon emissions decrease MTB of fracking firms more than non-fracking firms. Our dynamic panel approach provides a more accurate measure of the real effect of carbon emissions that is very robust to Tobin's q as alternative measure of firm value.