IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v97y2021ics0140988321000670.html
   My bibliography  Save this article

Financial distress and commodity hedging: Evidence from Canadian oil firms

Author

Listed:
  • Mo, Kun
  • Suvankulov, Farrukh
  • Griffiths, Sophie

Abstract

Properly implemented risk management practices can help maximize shareholder value by reducing the expected cost of financial distress, and as such firms in deeper financial distress are expected to hedge more. However, empirical studies on such relationship have yielded mixed results. This paper documents the main determinant of hedging decisions using a newly assembled dataset for 92 Canadian-based, publicly traded oil extraction companies between 2005 and 2015. We adopt empirical techniques - Honoré's semiparametric model and simultaneous equations with the minimum distance estimator - that explicitly deal with issues that frequently arise when studying hedging decisions, namely a clustering of firms that choose to not hedge at all and the endogeneity associated with concurrent determination of hedging and borrowing decisions. Even after controlling for endogeneity and other possible drivers of hedging, we still detect a positive and statistically significant relationship between a firm's perceived financial distress and the degree to which it hedges.

Suggested Citation

  • Mo, Kun & Suvankulov, Farrukh & Griffiths, Sophie, 2021. "Financial distress and commodity hedging: Evidence from Canadian oil firms," Energy Economics, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:eneeco:v:97:y:2021:i:c:s0140988321000670
    DOI: 10.1016/j.eneco.2021.105162
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988321000670
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2021.105162?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bessembinder, Hendrik, 1991. "Forward Contracts and Firm Value: Investment Incentive and Contracting Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(4), pages 519-532, December.
    2. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
    3. Georges Dionne & Thouraya Triki, 2013. "On risk management determinants: what really matters?," The European Journal of Finance, Taylor & Francis Journals, vol. 19(2), pages 145-164, February.
    4. Edward I. Altman, 2013. "Predicting financial distress of companies: revisiting the Z-Score and ZETA® models," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 17, pages 428-456, Edward Elgar Publishing.
    5. Ellul, Andrew & Jotikasthira, Chotibhak & Lundblad, Christian T., 2011. "Regulatory pressure and fire sales in the corporate bond market," Journal of Financial Economics, Elsevier, vol. 101(3), pages 596-620, September.
    6. Lee, Myoung-Jae, 1995. "Semi-parametric Estimation of Simultaneous Equations with Limited Dependent Variables: A Case Study of Female Labour Supply," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 187-200, April-Jun.
    7. Dion Bongaerts & K. J. Martijn Cremers & William N. Goetzmann, 2012. "Tiebreaker: Certification and Multiple Credit Ratings," Journal of Finance, American Finance Association, vol. 67(1), pages 113-152, February.
    8. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    9. Adam, Tim R. & Fernando, Chitru S., 2006. "Hedging, speculation, and shareholder value," Journal of Financial Economics, Elsevier, vol. 81(2), pages 283-309, August.
    10. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 967-999, August.
    11. Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), 2013. "Handbook of Research Methods and Applications in Empirical Finance," Books, Edward Elgar Publishing, number 14545.
    12. Walter Dolde, 1993. "The Trajectory Of Corporate Financial Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(3), pages 33-41, September.
    13. John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, vol. 57(2), pages 815-839, April.
    14. Gregory W. Brown & Peter R. Crabb & David Haushalter, 2006. "Are Firms Successful at Selective Hedging?," The Journal of Business, University of Chicago Press, vol. 79(6), pages 2925-2950, November.
    15. Rampini, Adriano A. & Sufi, Amir & Viswanathan, S., 2014. "Dynamic risk management," Journal of Financial Economics, Elsevier, vol. 111(2), pages 271-296.
    16. Tufano, Peter, 1996. "Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
    17. Darren J. Kisgen & Philip E. Strahan, 2009. "Do Regulations Based on Credit Ratings Affect a Firm's Cost of Capital?," NBER Working Papers 14890, National Bureau of Economic Research, Inc.
    18. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    19. Becketti, Sean & Gould, William & Lillard, Lee & Welch, Finis, 1988. "The Panel Study of Income Dynamics after Fourteen Years: An Evaluatio n," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 472-492, October.
    20. S. Waite Rawls & Charles W. Smithson, 1990. "Strategic Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(4), pages 6-18, January.
    21. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. "On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-284, March.
    22. Mnasri, Mohamed & Dionne, Georges & Gueyie, Jean-Pierre, 2017. "The use of nonlinear hedging strategies by US oil producers: Motivations and implications," Energy Economics, Elsevier, vol. 63(C), pages 348-364.
    23. Fehle, Frank & Tsyplakov, Sergey, 2005. "Dynamic risk management: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 78(1), pages 3-47, October.
    24. Adam, Tim R. & Fernando, Chitru S. & Salas, Jesus M., 2017. "Why do firms engage in selective hedging? Evidence from the gold mining industry," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 269-282.
    25. Yanbo Jin & Philippe Jorion, 2006. "Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 61(2), pages 893-919, April.
    26. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, vol. 109(2), pages 535-548.
    27. Michael P. Ross., 1998. "Corporate Hedging: What, Why and How?," Research Program in Finance Working Papers RPF-280, University of California at Berkeley.
    28. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, vol. 46(5), pages 1193-1205, September.
    29. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    30. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25, September.
    31. Nelson, James M. & Moffitt, Jacquelyn Sue & Affleck-Graves, John, 2005. "The impact of hedging on the market value of equity," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 851-881, October.
    32. Tim Adam & Vidhan K. Goyal, 2008. "The Investment Opportunity Set And Its Proxy Variables," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 31(1), pages 41-63, March.
    33. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-347, May.
    34. Spano, Marcello, 2004. "Determinants of hedging and its effects on investment and debt," Journal of Corporate Finance, Elsevier, vol. 10(1), pages 175-197, January.
    35. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    36. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley.
    37. Gordon M. Bodnar & Gregory S. Hayt & Richard C. Marston, 1998. "1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms," Financial Management, Financial Management Association, vol. 27(4), Winter.
    38. Guay, Wayne R., 1999. "The impact of derivatives on firm risk: An empirical examination of new derivative users1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 319-351, January.
    39. Opp, Christian C. & Opp, Marcus M. & Harris, Milton, 2013. "Rating agencies in the face of regulation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 46-61.
    40. Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," The Journal of Business, University of Chicago Press, vol. 55(2), pages 281-296, April.
    41. Erik P. Gilje & Jérôme P. Taillard, 2017. "Does Hedging Affect Firm Value? Evidence from a Natural Experiment," Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4083-4132.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Muhammad Kashif Ali & Muhammad Khurram Zahoor & Asif Saeed & Safia Nosheen, 2023. "Moderating effect of vertical integration on the relationship between sustainability and performance: evidence from oil and gas energy sector," Future Business Journal, Springer, vol. 9(1), pages 1-11, December.
    2. Dionne, Georges & El Hraiki, Rayane & Mnasri, Mohamed, 2022. "Determinants and real effects of joint hedging: An empirical analysis of the US petroleum industry," Working Papers 22-4, HEC Montreal, Canada Research Chair in Risk Management.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kun Mo & Farrukh Suvankulov & Sophie Griffiths, 2019. "Financial Distress and Hedging: Evidence from Canadian Oil Firms," Discussion Papers 2019-4, Bank of Canada.
    2. Fernando, Chitru S. & Hoelscher, Seth A. & Raman, Vikas, 2020. "The informativeness of derivatives use: Evidence from corporate disclosure through public announcements," Journal of Banking & Finance, Elsevier, vol. 114(C).
    3. Mnasri, Mohamed & Dionne, Georges & Gueyie, Jean-Pierre, 2013. "How do firms hedge risks? Empirical evidence from U.S. oil and gas producers," Working Papers 13-3, HEC Montreal, Canada Research Chair in Risk Management.
    4. Fauver, Larry & Naranjo, Andy, 2010. "Derivative usage and firm value: The influence of agency costs and monitoring problems," Journal of Corporate Finance, Elsevier, vol. 16(5), pages 719-735, December.
    5. Kevin Aretz & Söhnke M. Bartram, 2010. "Corporate Hedging And Shareholder Value," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(4), pages 317-371, December.
    6. Carter, David A. & Rogers, Daniel A. & Simkins, Betty J. & Treanor, Stephen D., 2017. "A review of the literature on commodity risk management," Journal of Commodity Markets, Elsevier, vol. 8(C), pages 1-17.
    7. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    8. Gunratan Lonare & Ahmet Nart & Ahmet M. Tuncez, 2022. "Industry tournament incentives and corporate hedging policies," Financial Management, Financial Management Association International, vol. 51(2), pages 399-453, June.
    9. Dionne, Georges & El Hraiki, Rayane & Mnasri, Mohamed, 2023. "Determinants and real effects of joint hedging: An empirical analysis of US oil and gas producers," Energy Economics, Elsevier, vol. 124(C).
    10. Chen, Jun & King, Tao-Hsien Dolly, 2014. "Corporate hedging and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 221-245.
    11. Merkel, Matthias F., 2018. "Foreign exchange derivative use and firm value: Evidence from German non-financial firms," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-33-18, University of Passau, Faculty of Business and Economics.
    12. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry," Cahiers de recherche 1337, CIRPEE.
    13. Dionne, Georges & Gueyie, Jean-Pierre & Mnasri, Mohamed, 2018. "Dynamic corporate risk management: Motivations and real implications," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 97-111.
    14. Dionne, Georges & El Hraiki, Rayane & Mnasri, Mohamed, 2022. "Determinants and real effects of joint hedging: An empirical analysis of the US petroleum industry," Working Papers 22-4, HEC Montreal, Canada Research Chair in Risk Management.
    15. Biguri, Kizkitza & Brownlees, Christian & Ippolito, Filippo, 2022. "Corporate hedging and the variance of stock returns," Journal of Corporate Finance, Elsevier, vol. 72(C).
    16. Tim R. Adam & Chitru S. Fernando & Evgenia Golubeva, 2012. "Managerial Overconfidence and Corporate Risk Management," SFB 649 Discussion Papers SFB649DP2012-018, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    17. Markus Hang & Jerome Geyer-Klingeberg & Andreas W. Rathgeber & Clémence Alasseur & Lena Wichmann, 2021. "Interaction effects of corporate hedging activities for a multi-risk exposure: evidence from a quasi-natural experiment," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 789-818, February.
    18. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 967-999, August.
    19. Dionne, Georges & Mnasri, Mohamed, 2018. "Real implications of corporate risk management: Evidence from U.S. oil producers," Working Papers 18-5, HEC Montreal, Canada Research Chair in Risk Management.
    20. Markus Hang & Jerome Geyer‐Klingeberg & Andreas W. Rathgeber & Stefan Stöckl, 2021. "Rather complements than substitutes: Firm value effects of capital structure and financial hedging decisions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 4895-4917, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:97:y:2021:i:c:s0140988321000670. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.