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

Author

Listed:
  • 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

Suggested Citation

  • Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "How Do Firms Hedge Risks? Empirical Evidence from U.S. Oil and Gas Producers," Cahiers de recherche 1307, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1307
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE13-07.pdf
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    Cited by:

    1. Georges Dionne & Marc Santugini, 2015. "Production Flexibility and Hedging," Risks, MDPI, Open Access Journal, vol. 3(4), pages 1-10, December.

    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;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • 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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