How Do Firms Hedge Risks? Empirical Evidence from U.S. Oil and Gas Producers

Mohamed Mnasri, Georges Dionne () and Jean-Pierre Gueyie

Cahiers de recherche from CIRPEE

Abstract: Using a unique, hand-collected data set on hedging activities of 150 US oil and gas producers, we study the determinants of hedging strategy choice. We also examine the economic effects of hedging strategy on firms’ risk, value and performance. We model hedging strategy choice as a multi-state process and use several dynamic discrete choice frameworks with random effects to mitigate the unobserved individual heterogeneity problem and the state dependence phenomena. We find strong evidence that hedging strategy is influenced by investment opportunities, oil and gas market conditions, financial constraints, the correlation between internal funds and investment expenditures, and oil and gas production specificities (i.e., production uncertainty, production cost variability, production flexibility). Finally, we present novel evidence of the real implications of hedging strategy on firms’ stock return and volatility sensitivity to oil and gas price fluctuations, along with their accounting and operational performance

Keywords: Risk management; derivative choice determinants; hedging strategies; linear and non-linear hedging; state dependence; dynamic discrete choice models; economic effects; oil and gas industry (search for similar items in EconPapers)
JEL-codes: D8 G32 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-dcm, nep-ene and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: How do firms hedge risks? Empirical evidence from U.S. oil and gas producers (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1307

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