This paper analyses the influence of commodity price shocks on companies’ firm value. Two timeframes of shocks on the commodities copper, aluminium as well as two rare earth elements, neodymium and lanthanum, were studied on their effects on stock prices.
Companies have been selected according to their industry, their size, country of origin and commodity exposure. Unique issues in this work are the focus on commodity price shocks and the pre- selection of companies, where the chosen commodities are assumingly key input factors. Therefore this paper attempts to shed new light on the importance of commodity price exposure for the firm value of companies.
Table of Contents
1. Introduction
2. Literature Review
3. Commodity price exposure
4. Methodology
4.1. Data Selection
4.1.1. Commodity exposure
4.1.2. Country of origin
4.1.3. Company Size
4.1.4. Commodity Prices
4.1.5. Index Selection
4.2. Regression Model
5. Results
6. Discussion and Conclusion
6.1. Practical Implications
6.2. Limitations and Further Research
Research Objectives and Key Themes
This paper investigates the impact of sudden commodity price shocks on the firm value of companies within the high-technology sector. The primary research question centers on whether stock prices of companies in exposed industries are significantly influenced by fluctuations in the prices of critical inputs such as aluminium, copper, neodymium, and lanthanum.
- Analysis of commodity price exposure for high-tech firms.
- Evaluation of firm size and geographic origin as moderating factors.
- Use of multiple regression analysis to determine stock price sensitivity.
- Testing of hypotheses regarding the persistency of price shocks.
- Comparison between developed and developing market exposure.
Excerpt from the Publication
1. Introduction
In the 18th century Thomas Robert Malthus, who helped to create mainstream economics, published an essay with the title “Essay on population” where he drew on rising populations which will inevitably outstrip available resources. Today his argumentation is more valid than ever, with the rise of vastly populated, resource hungry emerging economies, such as China and India (Farrell, 2008). There is some consensus about the sustainability of this trend with the Rogers International Commodity Index (RICI) recovering from the financial crisis to new all- time highs, marking an over 400% increase since 1998. The trend is also backed up by the research of Radetzki (2006) from which it can be assumed that the world is still in a commodity price boom with the sharpest increase in metal prices since 2003. Commodities across the globe have seen unprecedented rises in the last years, which lead to macroeconomic and political problems, such as increasing poverty. Looking at the importance and the impact that commodity prices have at the macroeconomic level, it seems likely that the trend of rising commodities has an impact at the corporate level as well, exerting an influence on corporate earnings and hence share prices.
Summary of Chapters
1. Introduction: Provides an overview of the rising importance of commodities in the global economy and defines the focus on corporate exposure.
2. Literature Review: Surveys existing academic research regarding the link between commodity price fluctuations and firm value, highlighting research gaps.
3. Commodity price exposure: Outlines the theoretical necessity for firms to hedge against input cost volatility and poses the main research questions.
4. Methodology: Details the criteria for company and data selection, as well as the specific regression model used for the empirical analysis.
5. Results: Presents the statistical findings of the regression analysis and tests the validity of the formulated hypotheses.
6. Discussion and Conclusion: Synthesizes the results, discusses the implications for management, and addresses the limitations of the study.
Keywords
Commodity price shocks, Firm value, Stock prices, High-tech industry, Aluminium, Copper, Neodymium, Lanthanum, Hedging, Systematic risk, Corporate earnings, Regression analysis, Emerging economies, Market volatility, Financial management.
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines how sudden shocks in the prices of selected industrial and rare earth commodities affect the stock market valuation of companies in the high-tech sector.
Which commodities are specifically investigated?
The study focuses on aluminium, copper, neodymium, and lanthanum, as these are critical input factors for high-technology production processes.
What is the central research question?
The central question is whether the stock prices of companies in industries exposed to these commodities are significantly influenced by specific commodity price shocks.
Which methodology is applied to test the hypotheses?
The authors utilize a multiple regression analysis based on the ordinary least squares (OLS) method to measure the exposure of sample firms to commodity price changes.
What does the main body of the work cover?
The main body covers a literature review, the theoretical framework of commodity exposure, the selection process for data and firms, the regression model, and a presentation of empirical results.
Which keywords best describe this study?
Key terms include commodity price shocks, firm value, high-tech industry, hedging, systematic risk, and rare earth elements.
Why were neodymium and lanthanum included in the analysis?
They were chosen because they are critical rare earth elements for modern technologies like wind turbines and rechargeable batteries, and they have experienced significant price volatility.
What was the outcome regarding the influence of geography?
The study found no significant differences in exposure between geographic clusters, such as companies in China versus those in developed nations, suggesting that global market integration mitigates localized effects.
How does the paper conclude regarding company size?
The hypothesis that smaller companies would be more heavily affected by commodity shocks was rejected, as the empirical results did not show a statistically significant difference compared to larger firms.
- Quote paper
- Philipp Heilmann (Author), Benjamin Ihbe (Author), Melanie Marziw (Author), 2011, The influence of commodity price shocks on share prices, Munich, GRIN Verlag, https://www.grin.com/document/190634
