Hedging, Liquidity, and Productivity
59 Pages Posted: 20 Nov 2020 Last revised: 24 Mar 2021
Date Written: March 7, 2021
to study the effects of liquidity and productivity on corporate hedging, we extend dynamic risk management models by incorporating procyclical collateral capacity and units-of-production depreciation and test the key predictions by using a comprehensive data set of oil and gas producers. After carefully isolating unpredictable shocks to firm liquidity and productivity, we find hedging intensity is positively correlated with liquidity and productivity. Furthermore, firms with more procyclical collateral capacity exhibit a more positive hedging-productivity correlation and firms with more flexible production technologies exhibit a more negative correlation between hedging and operating cash flows. These results challenge existing models but are consistent with our theory.
Keywords: Corporate hedging, Financial constraints, Productivity, Collateral constraint, Procyclical collateral capacity, Unit-of-production depreciation, Hedging capacity.
JEL Classification: G23, G30, G32
Suggested Citation: Suggested Citation