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On the strategic value of risk management

  • Léautier, Thomas-Olivier
  • Rochet, Jean-Charles

This article examines how rms facing volatile input prices and holding some degree of market power in their product market link their risk management and their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where risk averse rms decide on their hedging strategies before their product market strategies. We nd that hedging modi es the pricing and production strategies of rms. This strategic e¤ect is channelled through the risk-adjusted expected cost, i.e., the expected marginal cost under the probability measure induced by shareholders’ risk aversion. It has opposite e¤ects depending on the nature of product market competition: hedging toughens quantity competition while it softens price competition. Finally, if rms can decide not to commit on their hedging position, this can never be an equilibriumoutcome: committing is always a best response to non committing. In the Hotelling model, committing is a dominant strategy for all rms.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 13-433.

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Date of creation: 14 Sep 2013
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Publication status: Published in International Journal of Industrial Organization, vol.�37, novembre 2014, p.�153-169.
Handle: RePEc:tse:wpaper:27644
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/

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  1. Rochet, Jean-Charles & Villeneuve, Stéphane, 2004. "Liquidity Risk and Corporate Demand for Hedging and Insurance," IDEI Working Papers 254, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Décamps, Jean-Paul & Mariotti, Thomas & Rochet, Jean-Charles & Villeneuve, Stéphane, 2008. "Free Cash-Flow, Issuance Costs and Stock Price Volatility," IDEI Working Papers 518, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Dionne, Georges & Santugini, Marc, 2014. "Entry, imperfect competition, and futures market for the input," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 70-83.
  4. Guillaume Plantin & Bruno Biais & Thomas Mariotti & Jean-Charles Rochet, 2004. "Dynamic Security Design," GSIA Working Papers 2005-E5, Carnegie Mellon University, Tepper School of Business.
  5. Bruno Biais & Thomas Mariotti & Guillaume Plantin & Jean-Charles Rochet, 2007. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 345-390.
  6. Yanbo Jin & Philippe Jorion, 2006. "Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 61(2), pages 893-919, 04.
  7. Neng Wang & Hui Chen & Patrick Bolton, 2010. "A unified theory of Tobin's q, corporate investment, financing, and risk management," 2010 Meeting Papers 609, Society for Economic Dynamics.
  8. Frederic Loss, 2002. "Optimal Hedging Strategies and Interactions between Firms," FMG Discussion Papers dp399, Financial Markets Group.
  9. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 1-37, 02.
  10. PETER M. DeMARZO & YULIY SANNIKOV, 2006. "Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model," Journal of Finance, American Finance Association, vol. 61(6), pages 2681-2724, December.
  11. Gordon M. Bodnar & Bernard Dumas & Richard C. Marston, 2002. "Pass-through and Exposure," Journal of Finance, American Finance Association, vol. 57(1), pages 199-231, 02.
  12. Tim Adam & Sudipto Dasgupta & Sheridan Titman, 2007. "Financial Constraints, Competition, and Hedging in Industry Equilibrium," Journal of Finance, American Finance Association, vol. 62(5), pages 2445-2473, October.
  13. Ian Sheldon & Richard Sperling, 2003. "Estimating the Extent of Imperfect Competition in the Food Industry: What Have We Learned?," Journal of Agricultural Economics, Wiley Blackwell, vol. 54(1), pages 89-109.
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