Input Hedging, Output Hedging, and Market Power

Journal of Economics and Management Strategy, Forthcoming

Johnson School Research Paper Series No. 40-2010

50 Pages Posted: 19 Nov 2010 Last revised: 28 Jul 2016

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

S. Abraham Ravid

Yeshiva University - Syms School of Business

Date Written: July 27, 2016

Abstract

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

De Angelis, David and Ravid, S. Abraham, Input Hedging, Output Hedging, and Market Power (July 27, 2016). Journal of Economics and Management Strategy, Forthcoming; Johnson School Research Paper Series No. 40-2010. Available at SSRN: https://ssrn.com/abstract=1711254

David De Angelis (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://www.de-angelis.com

S. Abraham Ravid

Yeshiva University - Syms School of Business ( email )

United States

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