Corporate hedging and the variance of stock returns

Kizkitza Biguri, Christian Brownlees and Filippo Ippolito

Journal of Corporate Finance, 2022, vol. 72, issue C

Abstract: By means of a difference-in-differences approach on the volatility of stock returns (σ-DID), we investigate the effect that hedging has on corporate risk. Examining the relation between hedging and the idiosyncratic variance of stock returns, we show that when new commodity derivatives are introduced in the Chicago Mercantile Exchange (CME), firms with exposure to the commodities experience up to a 40% drop in the idiosyncratic variance of stock returns. The effect is persistent over time and it is associated with real effects: firms that hedge more also experience an increase in profit margins, investment, access to credit lines, and a drop in cash holdings. Our results establish a direct link between corporate risk management policies and stock return behavior.

Keywords: Hedging; Commodity derivatives; Risk management; Variance of stock returns; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: G12 G13 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:72:y:2022:i:c:s0929119921002698

DOI: 10.1016/j.jcorpfin.2021.102147

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