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Input Hedging, Output Hedging, and Market Power

De Angelis, David and Abraham, Ravid LU (2016) In Journal of Economics and Management Strategy
Abstract

We argue that commodity input hedging is different from commodity output hedging. Output hedging can be detrimental to "sector play." Furthermore, firms with market power that hedge outputs have incentives to over-produce and distort market prices. In rational markets, such hedging will be expensive and we expect to see a negative relationship between hedging and market power in "output industries" but not in "input industries." We test these predictions on a sample of S&P500 firms from 2001 to 2005. Our results support both hypotheses. Placebo tests show that the same empirical regularities do not apply to currency hedging. Finally, our empirical framework, which differentiates between hedging inputs and hedging outputs, can also... (More)

We argue that commodity input hedging is different from commodity output hedging. Output hedging can be detrimental to "sector play." Furthermore, firms with market power that hedge outputs have incentives to over-produce and distort market prices. In rational markets, such hedging will be expensive and we expect to see a negative relationship between hedging and market power in "output industries" but not in "input industries." We test these predictions on a sample of S&P500 firms from 2001 to 2005. Our results support both hypotheses. Placebo tests show that the same empirical regularities do not apply to currency hedging. Finally, our empirical framework, which differentiates between hedging inputs and hedging outputs, can also help in reconciling conflicting results in prior studies.

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Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
in press
subject
in
Journal of Economics and Management Strategy
publisher
Wiley-Blackwell
external identifiers
  • scopus:84991492477
  • wos:000394542600005
ISSN
1058-6407
DOI
10.1111/jems.12180
language
English
LU publication?
yes
id
a368d182-01f0-46ec-94ab-8393944b97a0
date added to LUP
2017-02-21 12:36:47
date last changed
2017-09-18 11:34:01
@article{a368d182-01f0-46ec-94ab-8393944b97a0,
  abstract     = {<p>We argue that commodity input hedging is different from commodity output hedging. Output hedging can be detrimental to "sector play." Furthermore, firms with market power that hedge outputs have incentives to over-produce and distort market prices. In rational markets, such hedging will be expensive and we expect to see a negative relationship between hedging and market power in "output industries" but not in "input industries." We test these predictions on a sample of S&amp;P500 firms from 2001 to 2005. Our results support both hypotheses. Placebo tests show that the same empirical regularities do not apply to currency hedging. Finally, our empirical framework, which differentiates between hedging inputs and hedging outputs, can also help in reconciling conflicting results in prior studies.</p>},
  author       = {De Angelis, David and Abraham, Ravid},
  issn         = {1058-6407},
  language     = {eng},
  publisher    = {Wiley-Blackwell},
  series       = {Journal of Economics and Management Strategy},
  title        = {Input Hedging, Output Hedging, and Market Power},
  url          = {http://dx.doi.org/10.1111/jems.12180},
  year         = {2016},
}