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THE INFLUENCE OF FIRM‐ AND CEO‐SPECIFIC CHARACTERISTICS ON THE USE OF NONLINEAR DERIVATIVE INSTRUMENTS
Author(s) -
Huang Pinghsun,
Ryan Harley E.,
Wiggins Roy A.
Publication year - 2007
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2007.00221.x
Subject(s) - cash flow , incentive , debt , monetary economics , derivative (finance) , business , nonlinear system , executive compensation , stock options , bond , economics , compensation (psychology) , stochastic game , econometrics , financial economics , microeconomics , finance , psychology , physics , quantum mechanics , psychoanalysis
Abstract We examine why firms use nonlinear derivatives (e.g., options). Our results suggest that option characteristics in investment opportunities and debt, the payoff structure of incentive compensation, and free cash‐flow agency problems influence the firm's choice. Investment opportunities, internally generated cash flow, business risk, and option compensation positively influence the use of nonlinear currency derivatives. Option feature in bonds positively influence the use of nonlinear interest rate derivatives, whereas bonus and stock compensation, and CEO tenure have a negative influence. In sum, nonlinear cash flow characteristics in investment opportunity, debt, and executive compensation all relate positively to nonlinear derivative usage.