Input and output Hedging and Firm Value: Evidence from the Gold Mining Industry

Abstract

This study explores the relationship between firm value and the use of commodity derivatives to hedge gold output and fuel input for a sample of gold mining firms during 2009-2017. We find no empirical support for a positive association between firm value, as measured by Tobin's Q, and the extent of gold and oil price risk management among our sample miners. In fact, we document a negative correlation between fuel hedging and Tobin’s Q ratios. We illustrate that this result may be explained by poor timing decisions and unfavorable movements in the oil market. We also examine whether hedgers in our sample is well described by the theoretical corporate risk management literature. Our results show that hedgers generally conform well to the value-maximization theories explaining hedging as a way for managers to reduce the cost of financial distress and the cost of underinvestment.