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Implications of Executive Hedge Markets for Firm Value Maximization

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  • Bogaçhan Çelen
  • Saltuk Özertürk

Abstract

"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". Copyright 2007, The Author(s) Journal Compilation (c) 2007 Blackwell Publishing.

Suggested Citation

  • Bogaçhan Çelen & Saltuk Özertürk, 2007. "Implications of Executive Hedge Markets for Firm Value Maximization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 319-349, June.
  • Handle: RePEc:bla:jemstr:v:16:y:2007:i:2:p:319-349
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    Cited by:

    1. Hung, Mao-Wei & Liu, Yu-Jane & Tsai, Chia-Fen, 2012. "Managerial personal diversification and portfolio equity incentives," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 38-64.
    2. Avdjiev, Stefan & Zeng, Zheng, 2009. "Impact of heterogeneous managerial productivity on executive hedge markets in an asymmetric information environment," Finance Research Letters, Elsevier, vol. 6(4), pages 187-201, December.
    3. Carr Bettis & John Bizjak & Swaminathan Kalpathy, 2015. "Why Do Insiders Hedge Their Ownership? An Empirical Examination," Financial Management, Financial Management Association International, vol. 44(3), pages 655-683, September.

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