The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry


  • Peter Tufano

    1. Harvard Business School
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    • Harvard Business School. I would like to thank John Campbell, Sanjiv Das, Ken Froot, John Parsons, André Perold, Mitch Petersen, Jack Porter, Paul Seguin, René Stulz, an anonymous referee, and seminar attendees at the University of Michigan, New York University, the University of Maryland, the University of Chicago, the Harvard Business School, the NBER Lunch Series, the Mineral Economics and Management Society, the Gold and Silver Institute, the Financial Management Association meetings and Charles River Associates for their comments on this work. I gratefully acknowledge the cooperation of Ted Reeve, who allowed me to use his surveys of gold mining firms' risk management activities, and research support by Jonathan Headley, B.J. Whalen, and Bhanu Narasimhan. Alberto Moel provided invaluable assistance with this project. Funding was provided by the Harvard Business School Division of Research as part of the Global Financial Systems project.


This paper studies the exposure of North American gold mining firms to changes in the price of gold. The average mining stock moves 2 percent for each 1 percent change in gold prices, but exposures vary considerably over time and across firms. As predicted by valuation models, gold firm exposures are significantly negatively related to the firm's hedging and diversification activities and to gold prices and gold return volatility, and are positively related to firm leverage. Simple discounted cash flow models produce useful exposure predictions but they systematically overestimate exposures, possibly due to their failure to reflect managerial flexibility.