Abstract

http://ssrn.com/abstract=1357385
 
 

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Risk Management and Firm Value: Evidence from Weather Derivatives


Francisco Perez-Gonzalez


Stanford University; National Bureau of Economic Research (NBER)

Hayong Yun


Michigan State University - Department of Finance

September 2010

AFA 2010 Atlanta Meetings Paper

Abstract:     
This paper examines the impact of financial innovation on firm value, investment, and financing decisions. More specifically, we examine the effect of the introduction of weather derivatives on electric and gas utilities, arguably some of the most weather-exposed businesses in the economy. Weather derivatives were introduced in 1997 to help firms manage their weather-related risk exposure. We derive instruments for weather derivative use based on historical (pre-1997) weather exposure. Intuitively, firms whose cash flows have historically fluctuated with changing weather conditions are, relative to other firms, more likely to use weather derivatives once they become available, irrespective of their investment opportunities. Using data from U.S. energy firms, we find that weather derivatives lead to higher market valuations, investments, and leverage. Overall, our results demonstrate that financial innovation can significantly affect firm outcomes and that risk management meaningfully affects valuation, investments, and financing decisions.

Number of Pages in PDF File: 49

Keywords: risk management, hedging, derivatives, firm value, capital structure, debt policy, weather risk

JEL Classification: G30, G32

working papers series





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Date posted: March 11, 2009 ; Last revised: October 12, 2010

Suggested Citation

Perez-Gonzalez, Francisco and Yun, Hayong, Risk Management and Firm Value: Evidence from Weather Derivatives (September 2010). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1357385 or http://dx.doi.org/10.2139/ssrn.1357385

Contact Information

Francisco Perez-Gonzalez
Stanford University ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Hayong Yun (Contact Author)
Michigan State University - Department of Finance ( email )
645 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)
HOME PAGE: http://https://sites.google.com/site/hayongy/
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