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CEO risk preferences, hedging intensity, and firm value

Author

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  • Chowdhury, Rajib
  • Doukas, John A.
  • Mandal, Sonik

Abstract

We examine the effect of hedging with different derivative instruments on the market value of firms run by CEOs with different risk preferences – based on a noble dataset over five years. We focus on the interest rate, commodity, and foreign exchange derivatives and find striking similarities in the hedging intensities of risk-seeking and risk-averse CEOs. Our findings show that when the average firm experiences an extreme (three-standard-deviation) change in interest rates, commodity prices, or foreign exchange rates, its derivatives portfolio creates only modest gains, regardless of CEO risk preferences. These findings are consistent with the view that hedging is just an insurance policy, not a value-increasing strategy. Our results suggest that CEOs, irrespective of their different risk preferences, are unwilling to forgo wealth-creating projects to hedge corporate risks.

Suggested Citation

  • Chowdhury, Rajib & Doukas, John A. & Mandal, Sonik, 2023. "CEO risk preferences, hedging intensity, and firm value," Journal of International Money and Finance, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:jimfin:v:130:y:2023:i:c:s0261560622001541
    DOI: 10.1016/j.jimonfin.2022.102751
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    More about this item

    Keywords

    Derivatives hedging; Hedging intensity; Firm value; CEO risk preferences; CEO compensation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • G3 - Financial Economics - - Corporate Finance and Governance

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