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Derivatives use and the value of cash holdings: Evidence from the U.S. oil and gas industry
Author(s) -
Choi Sanghak,
Jang Hyeonung,
Kim Daejin,
Seo Byoung Ki
Publication year - 2021
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22173
Subject(s) - cash , value (mathematics) , petroleum industry , business , fossil fuel , marginal value , monetary economics , economics , financial economics , finance , microeconomics , chemistry , environmental science , mathematics , organic chemistry , statistics , environmental engineering
We examine the effect of the oil and gas firms' use of derivatives for hedging risks on the marginal value of cash holdings. Analyzing 155 U.S. oil and gas producers from 1998 to 2017, we find that the use of derivatives for hedging risks, especially oil and gas‐related risk, reduces the marginal value of corporate cash holdings. Furthermore, the effect of using derivatives is stronger for firms exposed to higher risk. Our findings imply that cash holdings and derivatives use act as substitutes in hedging risk in this industry.