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

See all articles by Erik Gilje

Erik Gilje

University of Pennsylvania - The Wharton School

Jérôme Taillard

Babson College

Date Written: December 1, 2017

Abstract

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

Gilje, Erik and Taillard, Jérôme, Does Hedging Affect Firm Value? Evidence from a Natural Experiment (December 1, 2017). Review of Financial Studies. 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 )

323 Tomasso Hall
Babson Park, MA 02457
United States
6145994184 (Phone)

HOME PAGE: http://https://www.babson.edu/academics/faculty/faculty-profiles/jerome-taillard.php

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