CEO Entrenchment and Corporate Risk Management

Abstract:     
Will corporations hedge even if risk management does not raise firm value? We address this question by examining theoretically and empirically the effects of CEO entrenchment and overinvestment on corporate hedging. Our theoretical analysis indicates that the avoidance of financial distress costs and managerial risk aversion are not necessary for hedging and risk management by corporations. We also generate novel predictions on the influence of entrenchment related factors, CEO equity ownership, and available cash flows on hedging. Using a unique hand-collected dataset with detailed quarterly data on hedging by non-integrated exploration and production firms in the oil and gas industry, we test these predictions and find support for them. Corporate hedging intensity is positively (or negatively) related to internal and external governance factors that enhance (or weaken) CEO entrenchment, even after controlling for leverage, size, risk, and the marginal tax rate. Our study provides a new perspective and evidence on the determinants of corporate hedging.

Number of Pages in PDF File: 61

Keywords: Risk Management, Managerial Entrenchment, Free Cash Flows, Corporate Governance, Oil and Gas Industry

JEL Classification: G34, G30

working papers series