The Effect of Managerial Bonus Plans on Corporate Derivatives Usage

28 Pages Posted: 5 Nov 2007 Last revised: 24 Oct 2008

See all articles by Young Sang Kim

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Jouahn Nam

Pace University - Lubin School of Business

John Harris Thornton

Kent State University

Abstract

This paper examines the effect of risk management incentives resulting from managerial bonus plans on firms' derivatives usage. Partitioning the sample into firms whose managers are more likely to face convexity or concavity in the bonus payoff function, we find a negative relation between bonus plans and derivatives usage for firms in the convex region and a positive relation for firms in the concave region. These results provide evidence that the incentives inherent in managerial bonus plans managers to increase or decrease firm risk in order to maximize their expected bonus payments.

Keywords: Executive Compensation, Bonus Plans, Derivatives

JEL Classification: G32, G34, J33

Suggested Citation

Kim, Young Sang and Nam, Jouahn and Thornton, John Harris, The Effect of Managerial Bonus Plans on Corporate Derivatives Usage. Journal of Multinational Financial Management, 2008, Vol 18, 229-243.. Available at SSRN: https://ssrn.com/abstract=1025561

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Jouahn Nam

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212-346-1818 (Phone)
212-346-1573 (Fax)

John Harris Thornton (Contact Author)

Kent State University ( email )

College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1214 (Phone)
330-672-9806 (Fax)

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