Maturity, Speculation and Corporate Hedging: An Empirical Study in Oil and Gas Firms from 2000-2008

Abstract: In this paper, we develop a new but also under-researched measure for firms’ hedging practice: maturity. Comparison between the outputs of two sets of Tobit model using hedge ratio and maturity respectively shows that the costs of financial distress hypothesis and the financing costs hypothesis are partially supported by both hedge ratio and maturity. Besides, the economies of scale hypothesis receives supportive evidence when using maturity as the measure. Heckman two-step estimation suggests that the significant factors found in Tobit model are only significant determinants in the decision to hedge, while not in the extent of hedging. An independent variable accounting for firms' selective hedging behaviour is incorporated which is also found to be positively related to maturity in both Tobit model and Heckman two-step estimation. This finding is attributed to managers’ overconfidence and optimism biases. In addition, robustness tests corroborate our findings. Hence, maturity effectively supplements hedge ratio when evaluating a firm's hedging practice.