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Does Hedging Affect Firm Value? Evidence from a Natural Experiment

68 Pages Posted: 28 Dec 2014 Last revised: 15 Sep 2016

Erik Gilje

University of Pennsylvania - The Wharton School

Jérôme Taillard

Babson College

Date Written: July 25, 2016

Abstract

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

Gilje, Erik and Taillard, Jérôme, Does Hedging Affect Firm Value? Evidence from a Natural Experiment (July 25, 2016). Available at SSRN: https://ssrn.com/abstract=2543096 or http://dx.doi.org/10.2139/ssrn.2543096

Erik Gilje

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jérôme Taillard (Contact Author)

Babson College ( email )

Babson Park, MA 02457-0310
United States
781-239-6451 (Phone)

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