Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers

This paper studies the hedging activities of 119 U.S. oil and gas producers from 1998 to 2001 and evaluates their effect on firm value. Theories of hedging based on market imperfections imply that hedging should increase the firm's market value (MV). To test this hypothesis, we collect detailed...

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Bibliographic Details
Published in:The Journal of finance (New York) 2006-04, Vol.61 (2), p.893-919
Main Authors: JIN, YANBO, JORION, PHILIPPE
Format: Article
Language:English
Subjects:
Business structures
Business valuation
Crude oil
Empirical tests
Financial economics
Financial management
Firm value
Fossil fuels
Gas
Hedging
Natural gas reserves
Oil industry
Oil prices
Oil reserves
Petroleum industry
Production costs
Regression analysis
Risk management
Statistical median
Stock prices
Systematic risk
U.S.A
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Summary:This paper studies the hedging activities of 119 U.S. oil and gas producers from 1998 to 2001 and evaluates their effect on firm value. Theories of hedging based on market imperfections imply that hedging should increase the firm's market value (MV). To test this hypothesis, we collect detailed information on the extent of hedging and on the valuation of oil and gas reserves. We verify that hedging reduces the firm's stock price sensitivity to oil and gas prices. Contrary to previous studies, however, we find that hedging does not seem to affect MVs for this industry.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2006.00858.x