Do Firms Hedge Optimally? Evidence from an Exogenous Governance Change

53 Pages Posted: 19 Aug 2013 Last revised: 19 Jul 2014

See all articles by Sterling Huang

Sterling Huang

Singapore Management University - School of Accountancy

Urs Peyer

INSEAD - Finance

Benjamin Segal

Fordham University; Hebrew University of Jerusalem

Date Written: August 13, 2013


We ask whether firms hedge optimally by analyzing the impact the NYSE/NASDAQ listing rule changes have had, which exogenously imposed board composition changes on a subset of firms, on financial risk management. Using new proxies for the extent of financial risk management in non-financial firms we find that treated firms reduce their financial hedging, in a difference-in-difference framework. The reduction is concentrated in firms with higher conflicts of interests, such as a high CEO equity ownership level, which exposes them to more idiosyncratic risk, and a higher occurrence of option backdating. We reject the hypothesis that newly majority-independent boards reduce financial hedging due to a lack of knowledge. First, we find no difference in financial hedging for firms where SOX mandated the addition of a financial expert relative to those that already had such expertise. Second, shareholder value increases more during the period of time of the listing rule deliberations for treated firms that hedge prior to the treatment. We conclude that some firms hedge too much reducing shareholder value potentially to the benefit of under-diversified CEOs. We also show that board independence serves to reinforce monitoring which allows boards to cut back on excessive financial hedging.

Keywords: Board independence, hedging

JEL Classification: G34

Suggested Citation

Huang, Sterling and Peyer, Urs C. and Segal, Benjamin, Do Firms Hedge Optimally? Evidence from an Exogenous Governance Change (August 13, 2013). Singapore Management University School of Accountancy Research Paper No. 2014-14; INSEAD Working Paper No. 2013/111/FIN/ACC; 26th Australasian Finance and Banking Conference 2013. Available at SSRN: or

Sterling Huang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
6808 7929 (Phone)

Urs C. Peyer

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4178 (Phone)
+33 1 6072 4045 (Fax)

Benjamin Segal

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

Hebrew University of Jerusalem

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