Fair Value Gains and Losses in Derivatives and CEO Compensation

47 Pages Posted: 25 Jul 2011 Last revised: 7 May 2015

See all articles by Hariom Manchiraju

Hariom Manchiraju

Indian School of Business (ISB), Hyderabad

Susan Hamlen

State University of New York (SUNY) at Buffalo - Accounting & Law

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management

Date Written: March 1, 2015

Abstract

This study examines the sensitivity of CEO compensation to fair value gains and losses in derivatives for firms in the U.S. oil and gas industry. Our evidence indicates that firms use derivatives for both hedging and non-hedging purposes and that the derivative gains have a substantial impact on firms’ overall earnings. We find that CEOs are rewarded for hedge derivative gains, more so in firms facing high financial contracting costs. However, we find that non-hedge derivative gains are also rewarded. Further, the CEO compensation is more sensitive to non-hedge derivative gains than it is to non-hedge derivative losses. This is surprising because non-hedge derivatives often relate to speculation or inefficient hedging. Overall, our results suggest that the board does not fully distinguish between the nature of derivative activities and rewards all gains in a similar fashion. The presence of accounting financial expert on the compensation committee, however, does improve efficient contracting.

Keywords: derivative gains and losses, CEO compensation, corporate governance, earnings targets

JEL Classification: G30, M41, M43, M45

Suggested Citation

Manchiraju, Hariom and Hamlen, Susan and Kross, William and Suk, Inho, Fair Value Gains and Losses in Derivatives and CEO Compensation (March 1, 2015). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1894569 or http://dx.doi.org/10.2139/ssrn.1894569

Hariom Manchiraju (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Susan Hamlen

State University of New York (SUNY) at Buffalo - Accounting & Law ( email )

Buffalo, NY 14260
United States

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting ( email )

Buffalo, NY 14260
United States

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management ( email )

342 Jacobs Management Center
Buffalo, NY 14260-4000
United States
716-645-3215 (Phone)

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