Risk Management and Firm Value: Evidence from Weather Derivatives




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    • Pérez-González is from the Graduate School of Business, Stanford University and NBER. Yun is from the Eli Broad College of Business, Michigan State University. We thank Ken Ayotte, Robert Battalio, John Beshears, Jess Cornaggia, Peter Easton, Mara Faccio, Randall Heron, Dirk Jenter, Mitch Petersen, Paul Pfleiderer, Josh Rauh, Paul Schultz, Jeremy Stein, Phil Strahan, Annette Vissing-Jorgensen, Daniel Wolfenzon, and seminar participants at the American Finance Association annual meetings, University of Aberdeen, Boston College, University of British Columbia, University of Chicago, University of Edinburgh, the Federal Reserve Bank (Board of Governors), DePaul University, Indiana University, Northwestern University, University of Notre Dame, Ohio State University, Seoul National University, Stanford University, the Texas Finance Festival, and University of Toronto. We are particularly grateful to the Editor, Campbell Harvey, two anonymous referees, and the Associate Editor for their comments and suggestions. We also benefitted from a large number of conversations with market participants who provided valuable insights about this market. We also thank Laarni Bulan, Howard Diamond, and Paul Schultz for their help with accessing various data sources. All errors are our own.


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.