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

TLDR

Hedging theories based on market imperfections predict that hedging should increase a firm's market value. This study examines hedging activities of 119 U.S. oil and gas producers from 1998 to 2001 and evaluates their impact on firm value. The authors collected detailed data on hedging extent and reserve valuation for these producers.

Abstract

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 (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.