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Who Times the Foreign Exchange Market? Corporate Speculation and CEO Characteristics

49 Pages Posted: 24 Mar 2005 Last revised: 19 Jun 2012

Alessandro Beber

Cass Business School; Centre for Economic Policy Research (CEPR)

Daniela Fabbri

City University London - Sir John Cass Business School

Date Written: June 19, 2012

Abstract

This paper shows that managers' personal beliefs and individual characteristics explain a large share of the substantial time-variation of derivatives use beyond firm, industry, and market fundamentals. We construct a panel data set of foreign currency derivatives holdings and currency exposures for U.S. non-financial firms. We use a novel approach to build a firm-specific foreign exchange return. We find that managers adjust derivatives notional amounts in response to past foreign exchange returns, as if they were forming views on future currency prices. We then construct an empirical measure of speculative behavior for each firm to investigate the profile of the speculator. Firms where the CEO holds an MBA degree, is younger, and has less previous working experience speculate more. These results are consistent with overconfident managers taking more risk.

Keywords: behavioral corporate finance, CEO characteristics, speculation, corporate risk management

JEL Classification: G30

Suggested Citation

Beber, Alessandro and Fabbri, Daniela, Who Times the Foreign Exchange Market? Corporate Speculation and CEO Characteristics (June 19, 2012). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=686111 or http://dx.doi.org/10.2139/ssrn.686111

Alessandro Beber (Contact Author)

Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Daniela Fabbri

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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