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Effect of Corporate Risk Management on Dividend Policy: Evidence from US Oil and Gas Firms

Author

Listed:
  • Karima Ouederni

    (HEC Montréal)

  • Georges Dionne

    (HEC Montréal)

Abstract

This paper tests the real effect of corporate risk management on dividend policy within a signaling theory framework. We suggest that these policies are complementary and should therefore be positively related. Actual empirical results diverge regarding the sign and significance of this relationship. One potential explanation for this mixed evidence is reverse causality. We extend the theoretical framework of Bhattacharya (1979) by allowing firms to hedge future cash flows. The theoretical results suggest that dividend policy and corporate hedging are positively related. Using an instrumental variable approach, we show that corporate hedging emerges as a positive and significant determinant of dividend policy. Joint dividend and risk management decisions increase firm value.

Suggested Citation

Handle: RePEc:ris:riskmr:023858
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JEL classification:

  • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
  • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
  • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
  • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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