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The Value of Corporate Risk Management




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    • MacKay is from the School of Business Management, Hong Kong University of Science and Technology and Moeller is from the Babcock Graduate School of Management, Wake Forest University. We thank Evrim Akdoğu, Gilles Bernier, Martin Boyer, Andy Chen, Bhagwan Chowdhry, Sudipto Dasgupta, Mike Davis, Hemang Desai, Chitru Fernando, Chris Hogan, Jie Gan, Vidhan Goyal, Jiang Luo, Robert McDonald, Jody Magliolo, Dave Mauer, Gary Moskowitz, Josh Pollet, Steve Postrel, Ehud Ronn, Stuart Turnbull, Michael Van Breda, Kumar Venkataraman, Mungo Wilson, and seminar participants at the Frank Batten Young Scholars Conference (College of William and Mary), the Hong Kong University of Science and Technology, Southern Methodist University, the Northern Finance Association, and Texas Christian University for useful comments and discussions.


We model and estimate the value of corporate risk management. We show how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices. For a sample of 34 oil refiners, we find that hedging concave revenues and leaving concave costs exposed each represent between 2% and 3% of firm value. We validate our approach by regressing Tobin's q on the estimated value and level of risk management and find results consistent with the model.