A study of hedging at the firm level in u.s. oil and gas exploration firms

Abstract

This paper studies the hedging activities of 98 U.S. oil and gas exploration rms between 2004 and 2015. We investigate the following three hypothesis; (1) to what extent does hedging a ect rms' stock price exposure towards oil and gas price uctuations, (2) what are the value implications of hedging, and, (3) what are the determinants of hedging. To test these hypotheses, we collect detailed information on rm speci c characteristics and oil and gas prices from the rm's annual reports, Bloomberg and COMPUSTAT. We nd that hedging decreases the rms' stock price exposure towards oil and gas prices in the presence of decreasing price patterns, referred to as crisis periods. These periods are also the only periods we nd evidence of a hedging premium. Outside crisis periods, the market appears to penalize rms that hedge with a lower market value. We explain this as evidence of investor loss aversion. As for the determinants of hedging, we nd that the hedging decision is related to several rm characteristics, like size,