The Economics of Financial and Operational Hedging: Insights from U.S. Power Plants

15:40-17:00, Friday, October 9, 2026

I-206, Boxue Building

Dr. Dong YAN is now an Associate Professor of Finance at Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University. She earned her Ph.D. in Finance from HKUST Business School in 2015. Before joining SAIF, she held positions as an Associate Professor of Finance (with tenure) at the Rotterdam School of Management, Erasmus University and as an Assistant Professor of Finance at the Stockholm School of Economics. Professor Yan's research areas include corporate finance, corporate investment, the real effects of financial markets, private firms, and M&A. She has published several papers in internationally renowned journals such as the Review of Financial Studies and Review of Finance. Her research received several awards, such as the 2024 IQAM Prize for the best investment paper published in the Review of Finance and the 2025 Pagano-Zechner Prize for the best non-investment paper published in the Review of Finance. 

We examine how financial and operational hedging interact under financing frictions. Financial hedging weakens operational hedging incentives by reducing residual risk exposure (induces hedging overhang) but strengthens them by lowering risky-debt financing costs (mitigates debt overhang). These competing forces yield complementarity when financing frictions are severe, substitution otherwise. Using U.S. electric utilities, we document financial hedging overhang: firms using derivatives subsequently reduce inventory and capacity investments. Consistent with our mechanism, this substitution weakens when financing constraints tighten or when financial hedging more effectively reduces debt overhang.

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