Output-Hedging of Electric Utility Firms: The Role of Electricity Derivatives Markets
48 Pages Posted: 9 Jan 2018 Last revised: 6 Mar 2018
Date Written: January 5, 2018
Recent introductions of electricity derivatives markets create a unique setting for the analysis of output hedging of electric utility firms. We directly consult these financial innovations as a new measure of corporate hedging. In contrast to prior research focusing on endogenous variation in hedging behavior, this approach allows analyzing hedging as an exogenous event in order to overcome endogeneity problems. Based on a set of 16 events, the hedging behavior, the risk exposures, financing and investment decisions, and firm values are analyzed based on a sample of 159 firms form 40 countries for the years 2005–2015. The results show that the availability of electricity derivatives supports the decision to hedge and enables a firm to reduce its hedging volumes by substituting other hedging positions. Furthermore, electricity derivatives have a major impact on a firms diverse risk exposures. Additionally, electricity hedging significantly increases a firm’s debt capacity and investment expenditure. Surprisingly, electricity hedging has no firm value effect. Overall, the access to electricity derivatives markets is identified as a crucial country-level determinant for corporate hedging of electric utility firms. The results are highly relevant for electric utility firms, but also for market operators and policy makers.
Keywords: Corporate Hedging, Output Hedging, Electricity Derivatives, Electric Utility Firms
JEL Classification: G32, G38, L94
Suggested Citation: Suggested Citation