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Effects of CEO miscalibration on compensation and hedging

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  • Kim, Hwa-Sung

Abstract

Empirical evidence shows that CEOs are miscalibrated in that they underestimate market risk. We use a standard principal-agent model to investigate how CEO miscalibration influences compensation and hedging. CEOs hedge less as the level of CEO miscalibration increases. Consistent with the CEO miscalibration-compensation literature, the pay-performance sensitivity is positively related to CEO miscalibration. Further, our model predicts that the sensitivity of compensation to CEO miscalibration increases when it is more costly for miscalibrated CEOs to hedge market risk.

Suggested Citation

  • Kim, Hwa-Sung, 2019. "Effects of CEO miscalibration on compensation and hedging," Finance Research Letters, Elsevier, vol. 30(C), pages 216-220.
    • Handle: RePEc:eee:finlet:v:30:y:2019:i:c:p:216-220
    DOI: 10.1016/j.frl.2018.10.007
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    References listed on IDEAS

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    More about this item

    Keywords

    CEO miscalibration; Compensation; Hedging;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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