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Uncovering the asymmetric linkage between financial derivatives and firm value — The case of oil and gas exploration and production companies

Dinh Phan, Hoa Nguyen and Robert Faff

Energy Economics, 2014, vol. 45, issue C, 340-352

Abstract: We investigate the role of derivatives in enhancing firm value of US oil and gas exploration and production companies over the period of 1998–2009, using both cross-sectional and time-series tests. Initially focusing on Tobin's Q, we document a ‘hedging discount’ in periods of increasing oil and gas prices, while there is some evidence that hedging leads to an increase in firm value in periods of decreasing prices. In the companion time-series tests our core finding indicates that hedger portfolios underperform compared to non-hedger portfolios i.e. confirming a hedging discount. We extend these time series tests to provide a range of conditional analyses exploring the circumstances in which this discount manifests. Here we find that the hedging discount is specifically related to periods of elevating oil and gas prices, especially if the price is high.

Keywords: Oil and gas; Financial derivatives; Hedging; Firm value (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2014
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