Finance and Accounting Research Seminar with Professor Haibo Jiang

What drives variation in corporate hedging: price expectations or risk?

At the end of 1990s, about 80% of gold miners hedged their financial risks using derivatives. By 2010, this number was down to under 20%. We use this ‘great dehedging’ episode to shine new light on the practice of risk management. We find evidence consistent with the hypothesis that managers extrapolate past gold returns to set hedge ratios— miners hedge less when gold prices have risen in the recent past because they expect gold prices to continue to rise in the future. We find little evidence that the standard motivations for risk management—distress, investment, taxes, or financial constraints can explain the extent of dehedging we observe.