Walking the Walk: Selective Hedging and Inside Ownership
55 Pages Posted: 22 Sep 2015 Last revised: 13 Dec 2016
Date Written: November 27, 2015
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: Suggested Citation