Choices Among Alternative Risk Management Strategies: Evidence from the Natural Gas Industry

71 Pages Posted: 15 Jan 2000

See all articles by Christopher Geczy

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

Catherine M. Schrand

University of Pennsylvania - Accounting Department

Date Written: November 1999

Abstract

This paper examines the substitutability and complementarity of a variety of risk management strategies that firms can use to reduce price risk exposure. Time-series analysis over a period of significant regulatory changes indicates that natural gas companies increased diversification and started using derivatives as price risk increased following price deregulation and the regulated unbundling of sale and transmission activities. The use of derivatives is a substitute both for holding internal cash and for storing gas underground. The latter two activities are complements. In choosing between derivatives and storage or cash holdings, less profitable and more financially distressed firms are more likely to manage risk using derivatives. Accounting earnings management strategies, however, are not complements to activities that have a "real" effect on cash flow volatilityand diversification is not related to financial hedging activities. Market-based estimates of wellhead gas price sensitivities are negative prior to deregulation and become significantly positive following price deregulation. The change in exposure is consistent with the changing role of pipelines from buyers of gas for transport to only transporters of gas resulting from deregulation. Cross-sectional variation in price sensitivities is related to firms' use of combinations of operational (non-accounting) and financial hedging activities. Firms that pursue these activities have smaller and less variable risk-adjusted wellhead gas return exposures than firms that do not, especially post-deregulation.

Note: This paper was formerly titled "Alternative Hedging Strategies for Price and Regulatory Risk: The Natural Gas Industry Since 1978."

JEL Classification: G13, G31, G32, L71, Q48

Suggested Citation

Geczy, Christopher Charles and Minton, Bernadette A. and Schrand, Catherine M., Choices Among Alternative Risk Management Strategies: Evidence from the Natural Gas Industry (November 1999). Available at SSRN: https://ssrn.com/abstract=191890 or http://dx.doi.org/10.2139/ssrn.191890

Christopher Charles Geczy

University of Pennsylvania - The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)

Bernadette A. Minton (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

Catherine M. Schrand

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6798 (Phone)
215-573-2054 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,712
Abstract Views
6,138
rank
9,286
PlumX Metrics