Derivatives use and the value of cash holdings: Evidence from the U.S. oil and gas industry

Sanghak Choi, Hyeonung Jang, Daejin Kim and Byoung Ki Seo

Journal of Futures Markets, 2021, vol. 41, issue 3, 361-383

Abstract: We examine the effect of the oil and gas firms' use of derivatives for hedging risks on the marginal value of cash holdings. Analyzing 155 U.S. oil and gas producers from 1998 to 2017, we find that the use of derivatives for hedging risks, especially oil and gas‐related risk, reduces the marginal value of corporate cash holdings. Furthermore, the effect of using derivatives is stronger for firms exposed to higher risk. Our findings imply that cash holdings and derivatives use act as substitutes in hedging risk in this industry.

Date: 2021
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https://doi.org/10.1002/fut.22173

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