Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74

Sami Alpanda () and Adrian Peralta-Alva ()

Review of Economic Dynamics, 2010, vol. 13, issue 4, 824-842

Abstract: The market value of U.S. corporations was nearly halved during the oil crisis of 1973-74. In this paper, we investigate the hypothesis that the sharp rise in energy costs during this period resulted in the obsolescence of firms' existing capital and reduced their market value. To quantify this obsolescence channel of the energy crisis, we simulate a calibrated dynamic general equilibrium model, where firms adopt energy-saving technologies along with the rise in energy prices, and the value of their installed capital falls due to investment irreversibility. We find that this channel can account for a third of the decline in Tobin's q observed in the data. Separately, we consider the role of investment subsidies extended by the government during this period to expedite the adoption of energy-saving technologies. This extension of the model can account for more than half of the decline in q. We also find empirical support for the capital obsolescence channel in cross-sectional regressions, where we show that the sectoral variation in the decline of energy use following the crisis is significant in explaining the sectoral variation in the drop of market values. (Copyright: Elsevier)

Keywords: Oil crisis; Capital obsolescence; Stock market crash (search for similar items in EconPapers)
JEL-codes: E13 E44 G01 O30 (search for similar items in EconPapers)
Date: 2010
References: View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Working Paper: Oil crisis, energy-saving technological change and the stock market crash of 1973-74 (2008)
Working Paper: Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74 (2007)
Working Paper: Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74 (2006)
Working Paper: Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74 (2004)
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DOI: 10.1016/j.red.2010.04.003

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