Does Executive Portfolio Structure Affect Risk Management? CEO Risk-Taking Incentives and Corporate Derivatives Usage

39 Pages Posted: 7 Sep 2001

See all articles by Daniel A. Rogers

Daniel A. Rogers

Portland State University - School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

Abstract

This paper extends the investigation of the effect of managerial motives on hedging policy. I utilize a proxy variable that incorporates CEO incentives to increase risk relative to incentives to increase stock price. The variable is directly measured using observed characteristics of CEO portfolios of stock and option holdings. Furthermore, CEO risk-taking incentives are modeled as a choice variable to eliminate the simultaneity bias of modeling risk-taking incentives as an exogenous variable. If modeled as a simultaneous system of equations, a strong negative link between CEO risk-taking incentives and the amount of derivative holdings exists. This result is consistent with the notion that derivatives are used for hedging purposes. Both the characteristics of stock and option holdings are important in determining cross-sectional differences in corporate derivative holdings.

Keywords: Corporate hedging; Risk management; Executive compensation; Managerial incentives

JEL Classification: G13, G34, G39, J33

Suggested Citation

Rogers, Daniel A., Does Executive Portfolio Structure Affect Risk Management? CEO Risk-Taking Incentives and Corporate Derivatives Usage (June 2001). Available at SSRN: https://ssrn.com/abstract=281688 or http://dx.doi.org/10.2139/ssrn.281688

Daniel A. Rogers (Contact Author)

Portland State University - School of Business Administration ( email )

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