Financial Leverage, CEO Compensation, and Corporate Hedging: Evidence from Real Estate Investment Trusts

Posted: 30 Aug 2007

See all articles by Mine Ertugrul

Mine Ertugrul

University of Massachusetts Boston

Özcan Sezer

University of Toledo

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law

Abstract

This paper studies the determinants of corporate hedging practices in the REIT industry between 1999 and 2001. We find a positive significant relation beween hedging and financial leverage, indicating the financial distress costs motive for using derivatives in the REIT industry. Using estimates of the Black-Scholes sensitivity of CEO's stock option portfolios to stock return volatility and the sensitivity of CEO's stock and stock option portfolios to stock price, we find evidence to support managerial risk aversion motive for corporate hedging in the REIT industry. Our results indicate the CEO's cash compensation and the CEO's wealth sensitivity to stock return volatility are significant determinants of derivative use in REITs. We also document a significant positive relation between institutional ownership and hedging activity. Further, we find that probability of hedging is related to economies of scale in hedging costs.

Keywords: corporate hedging practices, real estate, CEO, cash compensation

Suggested Citation

Ertugrul, Mine and Sezer, Özcan and Sirmans, C. F., Financial Leverage, CEO Compensation, and Corporate Hedging: Evidence from Real Estate Investment Trusts. Journal of Real Estate Finance and Economics, Vol. 36, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=1010711

Mine Ertugrul

University of Massachusetts Boston ( email )

100 Morrissey Blvd
Boston, MA 02125
United States

Özcan Sezer

University of Toledo ( email )

Mail Stop 119, HH 3000
Toledo, OH 43606

C. F. Sirmans (Contact Author)

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law ( email )

Tallahasse, FL 32306
United States
850 644-4076 (Phone)

HOME PAGE: http://www.cob.fsu.edu/rmi

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