Input Hedging, Output Hedging, and Market Power
(2017) In Journal of Economics and Management Strategy 26(1). p.123-151- 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.
(Less)
- author
- De Angelis, David and Abraham, Ravid LU
- organization
- publishing date
- 2017-02
- type
- Contribution to journal
- publication status
- published
- subject
- in
- Journal of Economics and Management Strategy
- volume
- 26
- issue
- 1
- pages
- 123 - 151
- publisher
- Wiley-Blackwell
- external identifiers
-
- wos:000394542600005
- scopus:84991492477
- 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
- 2024-04-14 05:15:39
@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&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}}, number = {{1}}, pages = {{123--151}}, 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}}, doi = {{10.1111/jems.12180}}, volume = {{26}}, year = {{2017}}, }