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CEO Age, Risk Incentives, and Hedging Strategy
Author(s) -
Croci Ettore,
Giudice Alfonso,
Jankensgård Håkan
Publication year - 2017
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12166
Subject(s) - incentive , hedge , cash , business , derivative (finance) , executive compensation , compensation (psychology) , chief executive officer , market neutral , hedge fund , actuarial science , financial economics , finance , economics , microeconomics , psychology , ecology , management , psychoanalysis , biology
We test whether managerial preferences explain how firms hedge, using hand‐collected data on derivative portfolios in the oil and gas industry. How firms hedge involves choosing between linear contracts and put options, and deciding whether to finance these hedging positions with cash on hand or by selling call options. The likelihood of being a hedger increases with chief executive officer (CEO) age, and near‐retirement CEOs prefer linear hedging instruments. The predictions of the managerial risk incentives theory of hedging strategy, according to which managers with convex compensation schemes avoid hedging strategies that cap upside potential, find no support in the data.