Corporate Risk Management: The Hedging Footprint

Abstract

What risks do firms hedge? How much do they hedge? How far ahead do they hedge? What determines corporate hedging policy? Should firms hedge at all? Can corporate risk management create value? As straightforward and important as they might appear, these questions are still largely unresolved. One difficulty in answering them is lack of data: Large-sample studies rely on coarse measures (does a firm hedge or not?) that offer few insights and studies with precise measures rely on small-sample, proprietary data that do not generalize. We propose an alternative approach that extracts corporate hedging policy from publicly-available data. The key insight is that the way corporate risk-management activity is recorded (cash-flow hedge accounting) leaves a hedging footprint that we can uncover by regressing a firm’s sales (or costs) against past futures prices and recent spot prices. We apply our approach to a sample of 34 oil refiners and return to answer some of the above questions.