Does Hedging Affect Firm Value? Evidence from a Natural Experiment
Review of Financial Studies
74 Pages Posted: 28 Dec 2014 Last revised: 28 May 2019
Date Written: December 1, 2017
We exploit an exogenous change in basis risk in the oil and gas industry to analyze the channels through which hedging affects firm value. Using a difference-in-differences framework, we find that firms affected by a basis risk shock reduce investment, have lower valuations, sell assets, and reduce debt. 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: G30, G31, G32
Suggested Citation: Suggested Citation