by Seeking Alpha analysts. We also do not consider announcements about U.S. oil inventories because oil inventories could reflect both aggregate demand factors and current or future oil supplies.

To ensure that the event days are primarily oil-specific news or events about current and future oil supplies, we also use U.S. news coverage as a check. We use Dow Jones’s FACTIVA news database to count how many U.S. newspaper articles have the words “ _economy_ ” or “ _economic growth_ .” The number of articles represents how intensively news about the economy, or “aggregate demand news,” is covered. The assumption is that the higher the count in a day, the more important aggregate demand news is for that day. We collect article counts for all the days from 1/1/2020 to 6/30/2020. Then, we check econometrically if the log of article count for the event days is higher than that for the non-event days. We find they are not significantly different.

Second, OPEC announcements could reflect worries about global aggregate demand by OPEC. For example, an announcement that OPEC countries will be meeting to cut production could reflect their concerns that aggregate demand is low now or will be low in the future. Should this announcement be treated as an event about a possible current or future oil supply cut or aggregate demand decline? The reaction of oil prices in the market can help us answer this question. An aggregate demand decline shifts the demand curve for oil to the left, reducing its price. A cut in oil production shifts the supply curve for oil to the left, raising its price. We thus verify that oil prices increased following an OPEC announcement to cut production because investors perceive this news as a sign of possible cuts in current or future oil supply.

# **III. Results**

In this section, we present the main results from our estimation of the effect of oil prices on the returns of U.S. oil stocks. We present the results of our tests of whether the relationship between oil prices and oil stock returns is mediated by debt levels.

# **III.1 On the Average Effect of Oil Prices on U.S. Oil Stocks**

Our estimation results of oil price declines on oil firms’ stock prices cover January 2020 to the end of June 2020. During this period, the oil price varied between 60 and -37 dollars per barrel (WTI oil price went to a negative value on April 20, 2020). Table 2 presents both Ordinary Least Square (OLS) and Instrumental Variable (IV) results using the heteroscedasticity-based identification strategy approach.

A decline in oil prices statistically significantly reduces oil stock prices during this period. The OLS results (columns [1] and [2]) suggest a 1 percent decline in oil prices is associated with a 0.32 percent decline in oil firm stock prices. The IV results (columns [4] and [5]) suggest that, on average, a 1 percent decline in oil prices _causes_ a 0.43 to 0.44 percent decline in oil firms’ stock prices.<sup>13</sup> This magnitude is substantially larger than what Boyer and Filion (2007) reported: stock price-oil price elasticity for Canadian oil firms between 1995 and 2002 is 0.26.

> 13 Appendix Table A3 shows the elasticity of each US oil firm in our sample.

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