Journal of Financial Economics2013-09-05 2:57 AM

Does risk management matter? Evidence from the U.S. agricultural industry

• Risk management decisions and firm value are endogenous. • New insurance policies provide shocks to the supply of hedging instruments. • These shocks lead to greater productivity. • Productivity is a channel through which hedging could affect firm value. • Hedging improves productivity by relaxing financial constraints. Abstract This article constructs triple-difference tests around shifts in the supply of risk management instruments available to agricultural producers to reveal a positive relation between risk management and productivity. This relation is more robust when producers adopt instruments with payoffs linked to group performance and weaker when payoffs are linked to individual performance. Additionally, productivity is particularly high among risk-managing producers in counties containing high levels of bank deposits, a proxy for access to finance. Overall, this article illuminates the relation between hedging and real firm outcomes as well as the interaction between access to finance and firms' risk management choices.

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Journal of Financial Economics

The Journal of Financial Economics or JFE is a peer-reviewed academic journal covering theoretical and empirical topics in financial economics. Together with the Journal of Finance and the Review of Financial Studies, it is considered to be among the top three finance journals.

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