Input Hedging, Output Hedging, and Market Power

David De Angelis, Ravid Abraham

    Research output: Contribution to journalArticlepeer-review

    6 Citations (SciVal)

    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 help in reconciling conflicting results in prior studies.

    Original languageEnglish
    Pages (from-to)123-151
    JournalJournal of Economics and Management Strategy
    Volume26
    Issue number1
    DOIs
    Publication statusPublished - 2017 Feb

    Subject classification (UKÄ)

    • Business Administration

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