Hedging Firm's Idiosyncratic Risk from Commodity Financialization

We investigate the effect of commodity financialization on firm’s idiosyncratic risk. Our results reveal a positive effect of commodity financialization on firm’s idiosyncratic risk. Derivative usage and diversification strategy can negatively moderate the positive effect. Moreover, the positive effect of commodity financialization and the moderating effects of derivative usage and diversification strategy are more pronounced in firms with lower-quality information environment, lower hedging efficiency, and higher cash flow volatility. Additionally, we find that the relationship between the two hedging instruments is complementary, and the increased idiosyncratic risk caused by commodity financialization can be priced into the cost of equity.