Do Managerial Risk-Taking Incentives Influence Firms’ Exchange Rate Exposure?
49 Pages Posted: 14 Aug 2017 Last revised: 3 Oct 2017
Date Written: August 5, 2017
There is scant evidence on how risk-taking incentives impact specific firm risks. This has implications for board oversight of managerial risk taking, firms’ development of comparative advantage in taking particular risks, and compensation design. We examine this question for exchange rate risk. Using multiple identification strategies, we find that vega increases exchange rate exposure for purely domestic and globally engaged firms. Vega’s impact increases with international operations, declines post-SOX, and is robust to firm-level governance. Our results suggest that evidence that exposure reduces firm value can be viewed, in part, as a wealth transfer from shareholders and debt-holders to managers.
Keywords: exchange rate exposure, risk, managerial compensation, risk-taking incentives
JEL Classification: G32
Suggested Citation: Suggested Citation