Operational hedge and stock price crash risk

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Abstract
We utilize a sample of 44,344 firm-years (1990–2019) to examine the association between operational hedging and stock price crash risk. We examine the association between operational hedging and crash risk. Our operational hedge measure (OPERHEDGE), based on Kogan et al. (2023), indicates a rise in revenue leads to a nearly proportional increase in the cost of goods sold. We address endogeneity concerns through multiple methods and alternative measurements and find consistently negative and significant coefficients for OPERHEDGE. Robustness checks using alternative crash risk measures, time horizons and subsamples confirm the negative association between operational hedging and crash risk. Regression results support variable costs acting as a natural hedge against revenue fluctuations, leading to lower future crash risk for firms with stronger operational hedging. Notably, the negative relationship is stronger for firms experiencing declining earnings and with higher accruals management. The ability of an operational hedge to mitigate stock price crash risk remains an open question and is the focus of our research. The findings have important implications for corporate risk management, highlighting that operational decisions can play a crucial role in mitigating crash risk.

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