Revisiting the Hedging Positions of Oil Producers

Revisiting the Hedging Positions of Oil Producers

• Associate Professor of Finance Yiwei Fang
• Associate Professor of Finance Sang Baum (Solomon) Kang
• You Lu, Stuart Ph.D. student

Abstract:

Large efforts have been devoted to study corporate hedging activities and firm value. However, several research questions remain unanswered. Do the known determinants for hedging explain up-to-date empirical regularities for firms’ hedging activities? Do firms’ hedging behaviors change after the financial crisis? Are there any other factors that help explain firms’ hedging activities? Do the hedging activities add to the firm value? To answer these questions, we revisit the hedging positions of U.S. oil producers. Our evidence supports that the rationale to hedge is related to financing decision and does not support the tax benefit hypothesis. In particular, the likelihood of hedging is related to a firm’s financing cost, financial distress cost, and a firm’s business concentration. We distinguish between pure upstream firms and firms with diversified business segments. We separately analyze the effects of hedgings on firm value by different sub-periods (i.e., before crisis & after crisis and high OVX & low OVX). We identify that the firm’s hedging activities help increase firm value by stabilizing the sensitivity of firm value to oil price volatility for firms that mainly concentrate on oil production business.

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