Extrapolative Expectations and Corporate Risk Management

Abstract

Aggregate gold hedging by producers more than doubled over the 1990s and declined by 90% over the 2000s. We find that extrapolative expectations explain this pattern -- hedging varies inversely with past gold returns. Consistent with manager price expectations influencing hedging, measures of expected gold returns and the futures basis predict hedge ratios. Analysts and investors also act as if their expectations are extrapolative. Hedging losses result in greater forced CEO turnover, consistent with shareholders attributing these losses to lack of skill. Standard motivations for risk management -- distress, investment, taxes, or financial constraints cannot explain the time-series of gold hedging.