Does Hedging Affect Firm Value? Evidence from a Natural Experiment
68 Pages Posted: 28 Dec 2014 Last revised: 15 Sep 2016
Date Written: July 25, 2016
We study how and why hedging affects firms. To mitigate the endogeneity of hedging decisions, we exploit an exogenous change in basis risk in the oil and gas industry. Using a difference-in-differences framework, we find that firms affected by the basis risk shock reduce investment, have lower valuations, sell assets, and reduce debt relative to control firms. Our findings are driven by firms with ex ante high leverage. Overall, our results provide evidence that reducing the probability of financial distress and underinvestment risk are first order channels through which hedging affects firm value.
Keywords: hedging, risk management, basis risk, financial distress, underinvestment, oil
JEL Classification: G31, G32
Suggested Citation: Suggested Citation