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Managerial hedging ability and firm risk

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  • Lee Dunham

Abstract

Modern portfolio theory suggests that undiversified executives would choose to diversify their significant holdings of their firm’s stock if the opportunity was available. Recent work suggests that managerial hedging is more prevalent than in years past as more innovative hedging instruments have become available to executives. Typically, unrestricted shares are used in these hedging transactions whereas restricted shares are not. In this paper, I examine whether a CEO’s composition of firm stockholdings between restricted and unrestricted shares impacts the level of risk undertaken by the firm. I document a negative and statistically significant relationship between firm risk and the proportion of CEO total shareholdings that are unrestricted and this negative relationship holds for alternative measures of firm risk. This result supports the notion that the composition of a CEO’s portfolio of firm stock between restricted and unrestricted shares is a significant determinant of firm risk. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Lee Dunham, 2012. "Managerial hedging ability and firm risk," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(4), pages 882-899, October.
    • Handle: RePEc:spr:jecfin:v:36:y:2012:i:4:p:882-899
    DOI: 10.1007/s12197-010-9160-9
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    References listed on IDEAS

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    Cited by:

    1. Lee M. Dunham & Sijing Wei & Jiarui (Iris) Zhang, 2023. "Does a CEO’s ability to hedge affect the firm’s payout policy?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(2), pages 303-322, June.
    2. Jing Zhang & Jieun Chung, 2018. "Does geographical location matter for managerial compensation design?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(1), pages 1-32, January.
    3. Lee M. Dunham, 2018. "Does a CEO’s hedging ability affect the firm’s capital structure?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 615-630, July.
    4. Panta, Humnath, 2020. "Does social capital influence corporate risk-taking?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).

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    More about this item

    Keywords

    Executive Compensation; Managerial Hedging; Firm Risk; Restricted Stock; Unrestricted Stock; G35;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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