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Managerial Incentives And The Use Of Foreign-Exchange Derivatives By Banks


  • Lee C. Adkins
  • David A. Carter
  • W. Gary Simpson


We examine the effect of managerial compensation and ownership on the use of foreign-exchange derivatives by U.S. bank holding companies. We focus on derivatives used for purposes other than trading to investigate derivative use in a hedging framework. We use instrumental variables probit and sample-selection models to estimate the effects of endogenous and exogenous factors on the probability and extent of foreign-exchange derivatives used. We find that the use of derivatives is inversely related to option awards but positively related to managerial ownership. Finally, our results suggest that ownership by large institutional shareholders provides incentive for managers to hedge. 2007 The Southern Finance Association and the Southwestern Finance Association.

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  • Lee C. Adkins & David A. Carter & W. Gary Simpson, 2007. "Managerial Incentives And The Use Of Foreign-Exchange Derivatives By Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(3), pages 399-413.
  • Handle: RePEc:bla:jfnres:v:30:y:2007:i:3:p:399-413

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    References listed on IDEAS

    1. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    2. John L. Evans & Stephen H. Archer, 1968. "Diversification And The Reduction Of Dispersion: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 23(5), pages 761-767, December.
    3. Frankfurter, George M, 1976. "The Effect of "Market Indexes" on the Ex-Post Performance of the Sharpe Portfolio Selection Model," Journal of Finance, American Finance Association, vol. 31(3), pages 949-955, June.
    4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    5. Meyer, Jack, 1977. "Further Applications of Stochastic Dominance to Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(02), pages 235-242, June.
    6. Roll, Richard, 1978. "Ambiguity when Performance is Measured by the Securities Market Line," Journal of Finance, American Finance Association, vol. 33(4), pages 1051-1069, September.
    7. Fama, Eugene F, 1972. "Components of Investment Performance," Journal of Finance, American Finance Association, vol. 27(3), pages 551-567, June.
    8. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
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    Cited by:

    1. Belkhir, Mohamed & Boubaker, Sabri, 2013. "CEO inside debt and hedging decisions: Lessons from the U.S. banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 223-246.
    2. repec:eee:jbfina:v:86:y:2018:i:c:p:113-126 is not listed on IDEAS
    3. Liu, Qi & Sun, Bo, 2015. "Managerial compensation under privately-observed hedging and earnings management," Economics Letters, Elsevier, vol. 137(C), pages 1-4.
    4. Lee C. Adkins, 2008. "Small Sample Performance of Instrumental Variables Probit Estimators: A Monte Carlo Investigation," Economics Working Paper Series 0807, Oklahoma State University, Department of Economics and Legal Studies in Business.
    5. repec:eee:quaeco:v:65:y:2017:i:c:p:114-127 is not listed on IDEAS
    6. Nobuyuki Isagawa & Satoru Yamaguchi & Tadayasu Yamashita, 2010. "Debt Forgiveness And Stock Price Reaction Of Lending Banks: Theory And Evidence From Japan," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(3), pages 267-287.
    7. Dewally, Michaël & Shao, Yingying, 2013. "Financial derivatives, opacity, and crash risk: Evidence from large US banks," Journal of Financial Stability, Elsevier, vol. 9(4), pages 565-577.
    8. Mun, Kyung-Chun, 2016. "Hedging bank market risk with futures and forwards," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 112-125.
    9. Dawood Ashraf & Yener Altunbas & John Goddard, 2007. "Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 483-500.
    10. Lee C. Adkins, . "An Instrumental Variables Probit Estimator Using Gretl," EHUCHAPS, Universidad del País Vasco - Facultad de Ciencias Económicas y Empresariales.
    11. Belkhir, Mohamed, 2013. "Do subordinated debt holders discipline bank risk-taking? Evidence from risk management decisions," Journal of Financial Stability, Elsevier, vol. 9(4), pages 705-719.
    12. Krapl, Alain A. & White, Reilly S., 2016. "Executive pensions, risk-shifting, and foreign exchange exposure," Research in International Business and Finance, Elsevier, vol. 38(C), pages 376-392.

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