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CEO Entrenchment and Corporate Hedging: Evidence from the Oil and Gas Industry

Published online by Cambridge University Press:  06 June 2013

Praveen Kumar  and
Ramon Rabinovitch
Praveen Kumar
Affiliation:
[email protected]
Ramon Rabinovitch
Affiliation:
[email protected], Bauer College of Business, University of Houston, 334 Melcher Hall, Houston, TX 77204
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Abstract

Using a unique data set with detailed information on the derivative positions of upstream oil and gas firms during 1996–2008, we find that hedging intensity is positively related to factors that amplify chief executive officer (CEO) entrenchment and free cash flow agency costs. There is also robust evidence that hedging is motivated by the reduction of financial distress and borrowing costs, and that it is influenced by both intrinsic cash flow risk and temporary spikes in commodity price volatility. We present a comprehensive perspective on the determinants of corporate hedging, and the results are consistent with the predictions of the risk management and agency costs literatures.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 887 - 917
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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