Operational Hedging vs. Financial Hedging: Evidence from Oil Producers
Stuart School of Business research presentation by: Associate Professor of Finance Yiwei Fang, Associate Professor of Finance Sang Baum Kang, and Assistant Professor of Finance You Lu (Stuart Ph.D. MSC 鈥20), Soochow University, China
Operational Hedging vs. Financial Hedging: Evidence from Oil Producers
- Associate Professor of Finance Yiwei Fang
- Associate Professor of Finance Sang Baum Kang
- You Lu (Stuart Ph.D. MSC 鈥20), Assistant Professor of Finance, Soochow University, China
Abstract:
This paper investigates the effects of operational hedging on firm value and commodity price risks. It explores a novel type of operational hedging鈥攖he natural operational hedging positions between the upstream crude oil producers and the downstream oil consumers. Using hand-collected data of 267 unique oil-producing firms, we find that consistent with hedging theory, operational hedging adds to the firm value measured by Tobin鈥檚 Q. Operational hedging is sufficiently effective in reducing firms鈥 exposure to oil price risk. We also find that operational hedging is a substitute for financial hedging.
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