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Implications of Executive Hedge Markets for Firm Value Maximization
Author(s) -
Çelen Boǧaçhan,
Özertürk Saltuk
Publication year - 2007
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2007.00141.x
Subject(s) - incentive , business , swap (finance) , hedge , payment , personalization , finance , industrial organization , microeconomics , economics , marketing , ecology , biology
This paper analyzes the incentive implications of executive hedge markets. The manager can promise the return from his shares to third parties in exchange for a fixed payment—swap contracts—and/or he can trade a customized security correlated with his firm‐specific risk. The customized security improves incentives by diversifying the manager's firm‐specific risk. However, unless they are exclusive, swap contracts lead to a complete unraveling of incentives. When security customization is sufficiently high, the manager only trades the customized security—but not any nonexclusive swap contracts, and incentives improve. Access to highly customized hedge securities and/or exclusive swap contracts increases the manager's pay‐performance sensitivity .