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

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  • Mohamed Mnasri
  • Georges Dionne
  • Jean-Pierre Gueyie

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

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1307.

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Date of creation: 2013
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Handle: RePEc:lvl:lacicr:1307

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Related research

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;

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