STRATEGIC MANAGEMENT THROUGH HEDGING: A BEHAVIORAL ECONOMICS ANALYSIS

Abstract

Are firms’ strategic management decisions affected by behavioral factors? We estimate the determinants of jet fuel hedging decisions of 25 major non-U.S. airlines for the period 2004-2014 to identify the rational and behavioral predictors of airline hedging strategies. Using the airlines’ jet fuel hedge position as the dependent variable, we find a negative correlation with past hedge gain/loss and competitor hedging, and a positive correlation with airline age. The results are robust to alternative specifications and control variables. The contrarian hedging strategy regarding hedge gain/loss and competitor hedge is difficult to explain using existing rational or behavioral theory. We posit that the results for airline age are the result of structural inertia that increase risk aversion with organizational age. The effects of the behavioral variables are most significant in large, state-owned Asian airlines.