Hedging, Liquidity, and Productivity
68 Pages Posted: 20 Nov 2020
Date Written: October 26, 2020
We study the effects of liquidity and productivity on corporate hedging decisions using a comprehensive dataset of oil and gas producers. Over a longer sample period than prior literature, we discover that hedging intensity is positively correlated with unrealized hedging gains and output prices, but negatively with operating cash flows. These new empirical patterns together challenge existing risk management models as unrealized hedging gains represent an unexpected shock to internal liquidity, while both operating cash flows and output prices are positively related to productivity. Incorporating procyclical collateral capacity and production-dependent depreciation into existing models can explain our empirical findings.
Keywords: Corporate hedging, Financial constraints, Productivity, Collateral constraint, Procyclical collateral capacity, Production-dependent depreciation, Hedging capacity
JEL Classification: G23, G30, G32
Suggested Citation: Suggested Citation