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Input Hedging, Output Hedging, and Market Power

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  • David De Angelis
  • S. Abraham Ravid

Abstract

We argue that commodity input hedging is different from commodity output hedging. Output hedging can be detrimental to “sector play.” Furthermore, firms with market power that hedge outputs have incentives to over‐produce and distort market prices. In rational markets, such hedging will be expensive and we expect to see a negative relationship between hedging and market power in “output industries” but not in “input industries.” We test these predictions on a sample of S&P500 firms from 2001 to 2005. Our results support both hypotheses. Placebo tests show that the same empirical regularities do not apply to currency hedging. Finally, our empirical framework, which differentiates between hedging inputs and hedging outputs, can also help in reconciling conflicting results in prior studies.

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  • David De Angelis & S. Abraham Ravid, 2017. "Input Hedging, Output Hedging, and Market Power," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(1), pages 123-151, February.
    • Handle: RePEc:bla:jemstr:v:26:y:2017:i:1:p:123-151
    DOI: 10.1111/jems.12180
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    References listed on IDEAS

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    Cited by:

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    3. Haar, Lawrence & Gregoriou, Andros, 2021. "Risk management and market conditions," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. ElFayoumi, Khalid, 2018. "The balance sheet effects of oil market shocks: An industry level analysis," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 112-127.

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