Industry Tournament Incentives and Corporate Hedging Policies
67 Pages Posted: 13 Jun 2019
Date Written: May 31, 2019
This paper examines how a tournament among CEOs to progress within the CEO labor market changes their tendency toward corporate hedging policies. We exploit the textual analysis of 10-Ks to generate corporate hedging proxies. We find that the likelihood and intensity to hedge increase as the CEO labor market tournament prize augments. We also find a positive relation between industry tournament incentives (ITI) and foreign exchange (FX) hedging and interest rate hedging, but cannot detect a significant link between ITI and commodity hedging. We discover the mitigating impact of the corporate hedging on the amplifier effect of ITI on the cost of debt and stock price crash risk could be the possible reasons for the positive relation between ITI and corporate hedging. Lastly, findings show that the association between ITI and corporate hedging is more pronounced for the firms having financial constraint and operating in industries having higher CEO mobility, and when CEO is not a founder or not of the retirement age.
Keywords: corporate hedging, risk management, tournament incentives, executive compensation, risk-taking, pay gap, FX hedging
JEL Classification: G32, G34, J31, J33
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