Walking the Walk: Selective Hedging and Inside Ownership

55 Pages Posted: 22 Sep 2015 Last revised: 13 Dec 2016

See all articles by Håkan Jankensgård

Håkan Jankensgård

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

Date Written: November 27, 2015

Abstract

Firms commonly engage in a practice known as ‘selective hedging’, i.e. adjusting the timing and size of hedging programs based on market views. In this paper I examine if corporate governance arrangements influence the extent of selective hedging using hand-collected data from the oil and gas industry. The most robust finding is that selective hedging increases in inside ownership, which indicates that managers hedge more selectively when outside monitoring is weak. But, since high inside-ownership managers are betting money that is to some extent their own, it also suggests that these managers are confident. Another set of findings suggests over-confidence, however, since selective hedging is associated with lower realized derivative cash flows and lower firm value. Overall, my findings support the view that selective hedging is an outgrowth of the agency problem of corporate risk management.

Keywords: Selective hedging, agency costs, corporate governance, inside ownership

JEL Classification: G30, G32

Suggested Citation

Jankensgård, Håkan, Walking the Walk: Selective Hedging and Inside Ownership (November 27, 2015). Available at SSRN: https://ssrn.com/abstract=2662368 or http://dx.doi.org/10.2139/ssrn.2662368

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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