CEO Age, Risk Incentives, and Hedging Strategy

45 Pages Posted: 10 May 2014 Last revised: 13 Dec 2016

See all articles by Ettore Croci

Ettore Croci

Catholic University of the Sacred Heart of Milan

Alfonso Del Giudice

Catholic University of the Sacred Heart of Milan - Department of Economics and Business Administration

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Date Written: September 19, 2014

Abstract

This study tests if managerial preferences explain how firms hedge, i.e. how they choose between linear contracts and put options, and if they finance these hedging positions with cash-on-hand or by selling upside (call options). Using hand-collected data on derivative portfolios we characterize hedging strategies in the oil and gas industry. Our main findings are that the likelihood of being a hedger increases with CEO age, and that near-retirement CEOs prefer linear hedging instruments. This suggests that these CEOs place a premium on the additional certainty that comes with linear strategies. The predictions of the managerial risk incentives-theory of hedging strategy, according to which managers with convex compensation schemes would avoid hedging strategies that cap upside potential, find no support in the data. Our findings on managerial preferences add to previous literature emphasizing non-linear exposures and financial status as determinants of hedging strategy.

Keywords: Vega, executive compensation, hedging, options, CEO age

JEL Classification: G30, G32

Suggested Citation

Croci, Ettore and Del Giudice, Alfonso and Jankensgård, Håkan, CEO Age, Risk Incentives, and Hedging Strategy (September 19, 2014). Available at SSRN: https://ssrn.com/abstract=2434597 or http://dx.doi.org/10.2139/ssrn.2434597

Ettore Croci

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Alfonso Del Giudice

Catholic University of the Sacred Heart of Milan - Department of Economics and Business Administration ( email )

20123 Milano
Italy

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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