Erik Gilje

Fracking, Drilling, and Asset Pricing: Estimating the Economic Benefits of the Shale Revolution

We quantify the effect of a significant technological innovation, shale oil development, on asset prices. Using stock returns on major news announcement days allows us to link aggregate stock price fluctuations to shale technology innovations. We exploit cross-sectional variation in industry portfolio returns on days of major shale oil-related news announcements to construct a shale mimicking portfolio. This portfolio can explain a significant amount of variation in aggregate stock market returns, but only during the time period of shale oil development, which begins in 2012. Our estimates imply that

Does Hedging Affect Firm Value? Evidence from a Natural Experiment

3.5 trillion of the increase in aggregate U.S. equity market capitalization since 2012 can be explained by this mimicking portfolio. Similar portfolios based on major monetary policy announcements do not explain the positive market returns over this period. We also show that exposure to shale oil technology has significant explanatory power for the cross-section of employment growth rates of U.S. industries over this period.

Voter Preferences and Political Change: Evidence From Shale Booms

We study how and why hedging affects firms. To mitigate the endogeneity of hedging decisions, we exploit an exogenous change in basis risk in the oil and gas industry. Using a difference-in-differences framework, we find that firms affected by the basis risk shock reduce investment, have lower valuations, sell assets, and reduce debt relative to control firms. Our findings are driven by firms with ex ante high leverage. Overall, our results provide evidence that reducing the probability of financial distress and underinvestment risk are first order channels through which hedging affects firm value.

Who’s Paying Attention? Measuring Common Ownership and Its Impact on Managerial Incentives

Hydraulic fracking generated unexpected shale oil and gas booms. After these booms, voter support for Republicans rises, leading Republicans to win seats from Democrats. Roll-call voting by House members becomes more conservative after shale across issues extending beyond energy or the economy. The results suggest that changes in preferences on specific issues can have broad spillover effects across a wide range of policy outcomes.

Drilling and Debt

We derive a measure that captures the extent to which overlapping ownership structures shift managers’ incentives to internalize externalities. A key feature of the measure is that it allows for the possibility that not all investors are attentive to whether a manager’s actions benefit the investor’s overall portfolio. Empirically, we show that potential drivers of ownership overlap, including mergers in the asset management industry and the growth of indexing, could in fact diminish managerial motives. Our findings illustrate the importance of accounting for investor inattention and cast doubt on the possibility that the growth of common ownership has had a significant impact on managerial incentives.

Do Firms Engage in Risk-Shifting? Empirical Evidence

This paper documents a previously unrecognized debt‐related investment distortion. Using detailed project‐level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long‐run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long‐run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations.