Wrapped up in Cotton Wool: Does Manager’s Bankruptcy Experience Shape Corporate Hedging?

57 Pages Posted: 28 Sep 2023

See all articles by Abe de Jong

Abe de Jong

Monash University; University of Groningen; European Corporate Governance Institute (ECGI)

Taoran Guo

Monash University

Lubna Rahman

Monash University

Date Written: September 5, 2023

Abstract

Bankruptcy experience in managers’ prior careers is associated with increased firm’s hedging activities, especially when such an experience is more recent or occurs when the manager is in an executive role. Robust estimates with firm-fixed effects and matched sample analyses suggest that this evidence is unlikely to be driven by endogenous manager-firm matching. Compared to peers, bankruptcy-experienced managers’ hedging strategy adversely affects firm performance. The adverse impact of managers’ bankruptcy experience is more pronounced in firms with weaker corporate governance. Our evidence implies that managerial biases induced by prior bankruptcy experience can shape corporate hedging and have shareholder value implications.

Keywords: Corporate hedging, Risk management, Cash flow hedging, CEO, Bankruptcy experience

JEL Classification: G30; G32; G34

Suggested Citation

de Jong, Abe and Guo, Taoran and Rahman, Lubna, Wrapped up in Cotton Wool: Does Manager’s Bankruptcy Experience Shape Corporate Hedging? (September 5, 2023). Available at SSRN: https://ssrn.com/abstract=4562723 or http://dx.doi.org/10.2139/ssrn.4562723

Abe De Jong

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

University of Groningen ( email )

Postbus 72
9700 AB Groningen
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Taoran Guo

Monash University ( email )

Lubna Rahman (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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