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

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  • Mnasri, Mohamed

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Gueyie, Jean-Pierre

    (Université du Québec à Montréal)

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.

Suggested Citation

  • 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.
    • Handle: RePEc:ris:crcrmw:2013_003
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    Cited by:

    1. Liu Hong & Yongjia Li & Kangzhen Xie & Claire J. Yan, 2020. "On the Market Timing of Hedging: Evidence from U.S. Oil and Gas Producers," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 297-334, January.
    2. Georges Dionne & Marc Santugini, 2015. "Production Flexibility and Hedging," Risks, MDPI, vol. 3(4), pages 1-10, December.
    3. Kun Mo & Farrukh Suvankulov & Sophie Griffiths, 2019. "Financial Distress and Hedging: Evidence from Canadian Oil Firms," Discussion Papers 2019-4, Bank of Canada.
    4. Henok Kifle, 2017. "The Impact of Regulation on Corporate Hedging Activities and the Response of Corporates ¨C A Preliminary Conceptual Framework," Business and Management Research, Business and Management Research, Sciedu Press, vol. 6(4), pages 1-15, December.

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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