Input Hedging, Output Hedging and Market Power
David De Angelis
Rice University - Jesse H. Jones Graduate School of Business
S. Abraham Ravid
Yeshiva University - Syms School of Business
Johnson School Research Paper Series No. 40-2010
We argue that input and output hedging are very different. Furthermore, if firms are able to influence output prices, output hedging can create incentives for profit reducing over-production, which are not present in competitive markets. Thus we expect firms to hedge outputs less often than inputs and firms with market power to hedge outputs less often than competitive firms. We test these predictions on a sample of S&P500 firms from 2001 to 2005. The findings are consistent with our expectations. Firms with output market power tend not to hedge commodity risk. A placebo test shows that the same empirical regularities do not apply to currency hedging where there are competitive international markets. Finally, our empirical framework, which differentiates between input and output hedging, can also help reconcile conflicting results in prior studies.
Number of Pages in PDF File: 45
Keywords: Corporate Hedging, Market Power
JEL Classification: G3, G30, G32, L13Accepted Paper Series
Date posted: November 19, 2010 ; Last revised: June 3, 2013
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