This dissertation includes three chapters with a series of empirical investigations in areas of corporate risk management in the oil industry... Show moreThis dissertation includes three chapters with a series of empirical investigations in areas of corporate risk management in the oil industry.In the first chapter, I overview the oil industry. I introduce different crude oil-related business segments and how market risks affect them. The types of available financial hedging strategies and hedging instruments are also discussed.The second chapter studies the rationales for corporate risk management and the effects of the financial hedging activities on firm value. I revisit the hedging positions of U.S. oil producers and find evidence that for firms that purely involving in upstream activities, the hedging activities add to their market value. The sensitivity of Tobin’s Q to oil price variance is stabilized by hedging activities. Besides, there is an optimal hedging level, and over hedging will hurt firm value. Though firms claim that their hedging decisions are subject to the oil price movement in their annual report, my evidence does not support that firm’s hedging decisions are impacted by oil price movement.The third chapter investigates the effects of operational hedging on firm value and commodity price risks. It explores a novel type of operational hedging - the natural operational hedging positions between the upstream crude oil producers and the downstream oil consumers. Using hand-collected data of 272 unique oil-producing firms, I find that operational hedging is a substitute for financial hedging. Operational hedging is sufficiently effective in reducing firms’ exposure to oil price risk. Consistent with hedging theory, I also find that operational hedging adds to the firm value measured by Tobin’s Q. Show less
