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

Posted: 28 Dec 2004

See all articles by Yanbo Jin

Yanbo Jin

California State University, Northridge - Department of Finance, Financial Planning and Insurance

Philippe Jorion

University of California, Irvine - Paul Merage School of Business

Abstract

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. The oil and gas sample is ideal to test this hypothesis. It is a large sample of firms belonging to the same industry for which financial risk is important and with substantial variations in hedging ratios. We have collected detailed information on the extent of hedging and on the valuation of oil and gas reserves. We first verify that hedging reduces the firm's stock price sensitivity to oil and gas prices and that the effect is economically significant. Contrary to previous studies, however, we find that hedging does not seem to affect a firm's market value for this industry.

Keywords: Risk management, hedging, derivatives, oil and gas

JEL Classification: G14, G32

Suggested Citation

Jin, Yanbo and Jorion, Philippe, Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers. Available at SSRN: https://ssrn.com/abstract=635543

Yanbo Jin

California State University, Northridge - Department of Finance, Financial Planning and Insurance ( email )

Northridge, CA 91330-8379
United States

Philippe Jorion (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Campus Drive
Irvine, CA 92697-3125
United States
949-824-5245 (Phone)
949-824-8469 (Fax)

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