Risk Management Transparency and Compensation

54 Pages Posted: 25 Jul 2014 Last revised: 17 May 2019

See all articles by Chang Mo Kang

Chang Mo Kang

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Donghyun Kim

University of Wisconsin - Milwaukee

Date Written: May 15, 2019

Abstract

We examine the design of managerial compensation in a setting in which a manager must be induced to maximize shareholder value while managing the firm's cash flow risks. Our model shows that, while high-powered incentive pay (e.g., options) induces the manager to increase shareholder value, it also provides incentives to engage in unproductive risk-seeking activities. This trade-off suggests that transparent disclosures of risk management practices allow shareholders to provide more powerful incentives to the manager. We empirically test this prediction using the issuance of Statement of Financial Accounting Standards No. 133, which improves information disclosure of firm's use of derivatives.

Keywords: managerial compensation, risk management, corporate hedging, financial officers, FAS 133

JEL Classification: J33, M12, G34

Suggested Citation

Kang, Chang Mo and Kim, Donghyun, Risk Management Transparency and Compensation (May 15, 2019). Available at SSRN: https://ssrn.com/abstract=2470480 or http://dx.doi.org/10.2139/ssrn.2470480

Chang Mo Kang (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Donghyun Kim

University of Wisconsin - Milwaukee ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States

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