Product Price Risk and Liquidity Management: Evidence from the Electricity Industry

Charles A. Dice Center Working Paper No. 2017-12

Fisher College of Business Working Paper No. 2017-3-012

57 Pages Posted: 16 May 2017 Last revised: 27 Aug 2018

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2018

Abstract

Product price risk is a potentially important factor for firms’ liquidity management. A natural place to evaluate the impact of this risk on liquidity management is the electricity industry, since in 32 countries, producing firms sell electricity in volatile wholesale markets. Empirically, higher volatility of electricity prices leads to an increase in cash holdings, and this effect is robust to instrumenting for price risk using weather volatility. Cash increases more with price risk in firms using inflexible production and those that cannot easily hedge electricity prices through derivative markets, indicating that operating flexibility and hedging are substitutes for liquidity management.

Keywords: Electricity price volatility, cash holdings, weather volatility, operating flexibility, hedging

JEL Classification: G30, G32

Suggested Citation

Lin, Chen and Schmid, Thomas and Weisbach, Michael S., Product Price Risk and Liquidity Management: Evidence from the Electricity Industry (August 25, 2018). Charles A. Dice Center Working Paper No. 2017-12; Fisher College of Business Working Paper No. 2017-3-012. Available at SSRN: https://ssrn.com/abstract=2968502 or http://dx.doi.org/10.2139/ssrn.2968502

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Michael S. Weisbach (Contact Author)

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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