Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers


  • G. David Haushalter

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    • University of Oregon. I thank John McConnell (my thesis advisor), Wayne Mikkelson, René Stulz (the editor), and an anonymous referee for their many detailed comments. I have also greatly benefited from the comments of John Chalmers, Diane Del Guercio, Larry Dann, David Denis, Diane Denis, George Fenn, Jarrad Harford, Randy Heron, Tim Kruse, Erik Lie, Peter MacKay, Patrick McCarthy, Megan Partch, Mitchell Petersen, Gordon Phillips, and Sunil Wahal. This paper is adapted from my dissertation at the Krannert School of Management, Purdue University. An earlier version of this paper entitled “The role of corporate hedging: Evidence from oil and gas producers” was presented at the 1997 meeting of the Western Finance Association.


This paper studies the hedging policies of oil and gas producers between 1992 and 1994. My evidence shows that the extent of hedging is related to financing costs. In particular, companies with greater financial leverage manage price risks more extensively. My evidence also shows that the likelihood of hedging is related to economies of scale in hedging costs and to the basis risk associated with hedging instruments. Larger companies and companies whose production is located primarily in regions where prices have a high correlation with the prices on which exchange-traded derivatives are based are more likely to manage risks.