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. 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