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The Influence Of Firm- And Ceo-Specific Characteristics On The Use Of Nonlinear Derivative Instruments

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  • Pinghsun Huang
  • Harley E. Ryan
  • Roy A. Wiggins
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    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. 2007 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 30 (2007)
    Issue (Month): 3 ()
    Pages: 415-436

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    Handle: RePEc:bla:jfnres:v:30:y:2007:i:3:p:415-436

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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Georges Dionne & Karima Ouederni, 2010. "Corporate Risk Management and Dividend Signaling Theory," Cahiers de recherche 1008, CIRPEE.
    2. Frestad, Dennis, 2010. "Corporate hedging under a resource rent tax regime," Energy Economics, Elsevier, vol. 32(2), pages 458-468, March.
    3. Frestad, Dennis, 2010. "Convex costs and the hedging paradox," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 236-242, April.
    4. Pinghsun Huang & Timothy Louwers & Jacquelyn Moffitt & Yan Zhang, 2008. "Ethical Management, Corporate Governance, and Abnormal Accruals," Journal of Business Ethics, Springer, vol. 83(3), pages 469-487, December.
    5. Chiraz Ben Ali & Frédéric Teulon, 2014. "CEO Monitoring and board effectiveness - Resolving CEO compensation issue," Working Papers 2014-045, Department of Research, Ipag Business School.
    6. Huang, Pinghsun & Zhang, Yan & Deis, Donald R. & Moffitt, Jacquelyn S., 2009. "Do artificial income smoothing and real income smoothing contribute to firm value equivalently?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 224-233, February.

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