Input Hedging, Output Hedging, and Market Power
Journal of Economics and Management Strategy, Forthcoming
50 Pages Posted: 19 Nov 2010 Last revised: 28 Jul 2016
Date Written: July 27, 2016
We argue that commodity input hedging is different from commodity output hedging. Output hedging can be detrimental to “sector play.” Furthermore, firms with market power that hedge outputs have incentives to over-produce and distort market prices. In rational markets such hedging will be expensive and we expect to see a negative relationship between hedging and market power in “output industries” but not in “input industries.” We test these predictions on a sample of S&P500 firms from 2001 to 2005. Our results support both hypotheses. Placebo tests show that the same empirical regularities do not apply to currency hedging. Finally, our empirical framework, which differentiates between hedging inputs and hedging outputs, can also help reconcile conflicting results in prior studies.
Keywords: Corporate Hedging, Market Power
JEL Classification: G3, G30, G32, L13
Suggested Citation: Suggested Citation