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Risk Management and Firm Value: Evidence from Weather Derivatives

Year: 2013

Type: article

Abstract: ABSTRACT This paper shows that active risk management policies lead to an increase in firm value. To identify the effect of hedging and to overcome endogeneity concerns, we exploit the introduction of weather derivatives as an exogenous shock to firms’ ability to hedge weather risks. This innovation disproportionately benefits weather‐sensitive firms, irrespective of their future investment opportunities. Using this natural experiment and data from energy firms, we find that derivatives lead to higher valuations, investments, and leverage. Overall, our results demonstrate that risk management has real consequences on firm outcomes.

Source: The Journal of Finance

DOI: 10.1111/jofi.12061

Authors: FRANCISCO PÉREZ‐GONZÁLEZ, HAYONG YUN

Institutions: DePaul University, National Bureau of Economic Research, Seoul National University, University of Chicago, Michigan State University, Stanford University, University of Edinburgh

Language: English

Topic: Risk Management in Financial Firms

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2331279603

FWCI: 87.49

Cites: 64

Cited by: 327

Related to: 10