The Association Between Earnings Sensitivity Measures and Market Determined Risk Exposures: The Case of Oil Price Risk for Petroleum Refiners

Using a sample of petroleum refining firms, this paper provides evidence that earnings sensitivity measures analogous to those mandated by the SEC’s (1997) new market risk disclosure rules are positively associated with stock market determined oil price exposures. We also find that earnings sensitivity measures are useful in predicting future stock market determined oil price exposures. Because sensitivity disclosures under SEC (1997) are either unavailable or cross-sectionally not comparable at the present time, this study constructs proxies for earnings sensitivity measures using extant information. Hence, we view our study as providing early evidence on the risk-relevance of the newly mandated earnings sensitivity disclosures.