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Haushalter et al. [2001] also show that, on average, the hedging activities of oil producers
(the extent of hedging) do not materially affect their stock’s sensitivity to changes in oil
price uncertainty. One possible explanation for their result can be that oil producers often
hedge using short-term financial instruments, generally maturing in less than a year. This is
in line with the argumentation of Stulz [1996], who contends that short-term hedging
instruments tend to affect a small portion of a company’s value, therefore, the use of shortterm
hedging instruments does not materially affect the variability of company’s value.
Another possibility, presented by Haushalter et al. [2001], is that the market does not fully
recognize the variation in the hedging activities of firms due to the lack of disclosure on
these activities. A common reason offered by companies for this lack of disclosure is that
providing these data would hurt their competitiveness in the oil industry. This indicates
that some companies view the costs of providing data on hedging to be greater that
potential rewards they expect from the financial markets for hedging. Hence, in light of the
results of Haushalter et al. [2001], firms appear to be less capable in reducing firm value
volatility by active hedging with the use of derivatives, it is rather the industry and firmlevel
specifics (such as, long term asset-side cash flow volatility, (optimal) leverage) that
determine the value-impact of risk exposures on firm value.
A Lookman [2005b] modell
The results of Lookman [2005b] reinforce that the effect of hedging on firm value, if any,
is marginal. Unlike the prior literature, he first disaggregates a firm’s risk exposures into
primary risks that have a significant impact on a firm’s financial condition and secondary
risks that only have a minimal impact. 197 He then separately analyzes the valuation impact
of hedging each type of risk. His hypothesis is that if hedging causes firm value to
increase, hedging a primary risk should result in a larger premium as compared to hedging
a secondary risk, because the resulting decrease in cash flow volatility and therefore in
frictional costs will be greater.
197 The fact that firms are exposed to large primary risks and small secondary risks is well documented. For
example, in a clinical examination of a US firm with significant foreign operations, Brown [2001] finds that
industry returns factor, a proxy for primary business risk, is highly significant in explaining the firm’s stock
returns whereas foreign currency exchange rates, a proxy for secondary risk, is not.
194