Industry Tournament Incentives and Corporate Hedging Policies

Financial Management, published on 07/14/2021

Posted: 19 Aug 2021 Last revised: 20 Aug 2021

See all articles by Gunratan Lonare

Gunratan Lonare

University of North Carolina (UNC) at Charlotte

Ahmet Nart

University of North Carolina (UNC) at Charlotte

Ahmet M. Tuncez

University of Michigan at Dearborn - College of Business

Date Written: July 10, 2021

Abstract

This paper examines how a tournament among CEOs to progress within the CEO labor market influences their corporate hedging policies. We employ a textual analysis of 10-Ks to generate corporate hedging proxies, finding that the likelihood and intensity of hedging grow as the CEO labor-market tournament prizes increase. We also explore the mitigating impact of corporate hedging on the adverse effects of risk-inducing industry tournament incentives (ITIs) on the cost of debt and stock price crash risk, noting that these could be possible reasons behind the relation. Additionally, we observe that the relationship between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and for firms whose CEOs are the founders of the company or are of retirement age. We identify a causal relation between ITIs and corporate hedging using an instrumental variable approach and an exogenous shock sourced from changes in the enforceability of non-competition agreements across states.

Keywords: corporate hedging, risk management, tournament incentives, executive compensation, risk-taking, pay gap, FX hedging

JEL Classification: G32, G34, J31, J33

Suggested Citation

Lonare, Gunratan and Nart, Ahmet and Tuncez, Ahmet M., Industry Tournament Incentives and Corporate Hedging Policies (July 10, 2021). Financial Management, published on 07/14/2021, Available at SSRN: https://ssrn.com/abstract=3397444 or http://dx.doi.org/10.2139/ssrn.3397444

Gunratan Lonare (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

Ahmet Nart

University of North Carolina (UNC) at Charlotte ( email )

Charlotte, NC
United States

Ahmet M. Tuncez

University of Michigan at Dearborn - College of Business ( email )

Fairlane Center South
19000 Hubbard Drive
Dearborn, MI 48126-2638
United States

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