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Hedging firm's idiosyncratic risk from commodity financialization

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  • Yang, Baochen
  • Geng, Peixuan
  • Fan, Ying

Abstract

We investigate the effect of commodity financialization on firm's idiosyncratic risk. Our results reveal a positive effect of commodity financialization on firm's idiosyncratic risk. Derivative usage and diversification strategy can negatively moderate the positive effect. Moreover, the positive effect of commodity financialization and the moderating effects of derivative usage and diversification strategy are more pronounced in firms with lower-quality information environment, lower hedging efficiency, and higher cash flow volatility. Additionally, we find that the relationship between the two hedging instruments is complementary, and the increased idiosyncratic risk caused by commodity financialization can be priced into the cost of equity.

Suggested Citation

  • Yang, Baochen & Geng, Peixuan & Fan, Ying, 2023. "Hedging firm's idiosyncratic risk from commodity financialization," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 815-842.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:815-842
    DOI: 10.1016/j.iref.2023.07.012
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    References listed on IDEAS

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    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Jia, Xiangfu & Liao, Wenting & Zhang, Chengsi, 2022. "Commodity financialization and funding liquidity in China," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    3. Silvennoinen, Annastiina & Thorp, Susan, 2013. "Financialization, crisis and commodity correlation dynamics," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 42-65.
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    Cited by:

    1. Ma, Anmiao, 2024. "The role of management characteristics in trade frictions and corporate financialization," Finance Research Letters, Elsevier, vol. 65(C).

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