Active risk management practices such as hedging increase a company’s value, according to a forthcoming study in the Journal of Finance. The study examined the effect of weather derivatives on electric and gas utilities to explore how financial innovation influences firm value, investment and financing decisions. Though theoretical research has looked at whether hedging increases company value, it has been difficult to prove in practice because companies do not randomize their hedging policies.
Researchers examined stock market and financial statement data from 1960 to 2007 for 203 utilities and found that using weather derivatives led to higher market valuations, investments and leverage for companies.
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