Corporate cash holdings in the oil and gas industry: The role of energy directives

With the implementation of energy directives and increasing competition among the market players, energy firms face more uncertainty than past. As being one of the most prominent factors for energy firms, industry-specific regulations and directives related to the energy security and climate change have a considerable impact not only on their performances but also on their corporate strategies. In this chapter, we investigate the impact of the energy directives on the corporate cash holding decisions of the energy firms in Europe. Using a large number of firms and a variety of econometric approaches, our findings suggest that there are significant differences among countries in terms of cash holding decisions and the impact of energy directives. We find that the energy firms in the Northern and Western Europe increase their cash holdings as a buffer against the unexpected cash shortages with the implementation of the Second and Third Energy Directives. However, directives do not have any impact on the cash accumulation of the energy companies in the UK and Eastern Europe. Our results also suggest that speed of adjustment toward the target cash position for the energy firms in Eastern Europe (Northern Europe) decreases (increases) with the implementation of the Second and the Third Energy Directives. Overall, the results suggest that energy directives have a strong influence on the energy firms in Northern, Western, and Eastern Europe, but firms in the UK are less sensitive to the changes in the industry dynamics in terms of cash accumulation and the speed of adjustment toward the target cash position. The findings of this study shed important lights on how industry-specific regulations affect the cash holding decision of energy firms, which is often a neglected issue in the energy economics.