Faculty of Business and Economics
University of Hong Kong
Institutional Affiliation: University of Hong Kong
NBER Working Papers and Publications
|May 2017||Price Risk, Production Flexibility, and Liquidity Management: Evidence from Electricity Generating Firms|
with Chen Lin, Michael S. Weisbach: w23434
Production inflexibility together with product price uncertainty creates price risk, which is a potentially important factor for firms’ liquidity management. One industry for which price risk can be measured is the electricity producing industry. We use data on hourly electricity prices in 41 markets to measure fluctuations in output prices and information on over 60,000 power plants to approximate firms’ flexibilty to vary output quantities. Our results suggest that higher electricity price volatility leads to increased cash holdings, but only in firms using inflexible production technologies. This effect is robust to a number of specification choices including instrumenting for volatility in electricity prices using weather forecast data. After deregulation, firms hold 20-25% more cash, ...