How do firms hedge risks? Empirical evidence from U.S. oil and gas producers

Mohamed Mnasri (), Georges Dionne () and Jean-Pierre Gueyie ()
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Mohamed Mnasri: HEC Montreal, Canada Research Chair in Risk Management
Jean-Pierre Gueyie: Université du Québec à Montréal

No 13-3, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

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: D80 G32 (search for similar items in EconPapers)
Pages: 89 pages
Date: 2013-04-08
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Citations: View citations in EconPapers (3)

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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:ris:crcrmw:2013_003

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