Conditional Capital Surplus and Shortfall across Resource Firms

Author Name Denny IRAWAN (Australian National University) / OKIMOTO Tatsuyoshi (Visiting Fellow, RIETI)
Creation Date/NO. April 2021 21-E-031
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This study examines the conditional capital surplus and shortfall dynamics of renewable and non-renewable resource firms. To this end, this study uses the systemic risk index by Brownlees and Engle (2017) and considers two conditional systemic events, namely, the stock market crash and the commodity price crash. The results indicate that companies in the resource sector tended to have conditional capital shortfalls before 2000 and conditional capital surpluses after 2000 owing to the boom of the commodity sector stock prices and the careful capital management adopted by these companies. The analysis using the panel vector autoregressive model indicates that commodity price, geopolitical, and economic policy uncertainties have a positive impact on the conditional capital shortfall. These uncertainties have also been proven to increase the conditional failure probability of firms in the sample. Lastly, the analysis of performance shows that conditional capital shortfall positively affects market returns, reflecting a high-risk, high-return trade-off for this sector.