We examine market reactions to farmout agreements, a popular form of strategic alliance, undertaken by oil and gas firms worldwide. This study is motivated by a gap in the literature regarding empirical studies of farmout arrangements. Using a sample of 589 farmor and 389 farminee announcements over 722 farmout agreements during the period 1990−2016, we document significant market reactions in order of 3.6% over a three-day event window to the farmors. Cross-sectional regressions of event returns provide results consistent with the resource pooling and expertise hypotheses. Furthermore, we also find evidence consistent with farmout agreements as real options by showing that farmors' stock prices are sensitive to the underlying oil price uncertainty.
We examine market reactions to farmout agreements, a common form of strategic alliance undertaken by oil and gas explorers internationally. Using an Australian sample of 722 farmout agreements announced during the 1990–2016 period, we find that farmout announcements generate a positive cumulative average abnormal return of 3.60% for farmors and 1.90% for farminees over a 3-day event window. Cross-sectional analysis of farmors’ event returns provides results consistent with the resource pooling hypotheses. We also find that farmors’ announcement returns are sensitive to the underlying oil price volatility, consistent with the real options view of farmout arrangements.
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