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Do managerial risk-taking incentives influence firms' exchange rate exposure?

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  • Francis, Bill B.
  • Hasan, Iftekhar
  • Hunter, Delroy M.
  • Zhu, Yun

Abstract

There is scant evidence on how risk-taking incentives impact specific firm risks. This has implications for board oversight of managerial risk taking, firms' development of comparative advantage in taking particular risks, and compensation design. We examine this question for exchange rate risk. Using multiple identification strategies, we find that vega increases exchange rate exposure for purely domestic and globally engaged firms. Vega's impact increases with international operations, declines post-SOX, and is robust to firm-level governance. Our results suggest that evidence that exposure reduces firm value can be viewed, in part, as a wealth transfer from shareholders and debt-holders to managers.

Suggested Citation

  • Francis, Bill B. & Hasan, Iftekhar & Hunter, Delroy M. & Zhu, Yun, 2017. "Do managerial risk-taking incentives influence firms' exchange rate exposure?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 154-169.
    • Handle: RePEc:eee:corfin:v:46:y:2017:i:c:p:154-169
    DOI: 10.1016/j.jcorpfin.2017.06.015
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    3. Hong, Jieying, 2019. "Managerial compensation incentives and corporate debt maturity: Evidence from FAS 123R," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 388-414.
    4. Likitwongkajon, Napaporn & Vithessonthi, Chaiporn, 2022. "Internationalization, foreign exchange exposure and firm risk," International Review of Financial Analysis, Elsevier, vol. 83(C).
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    6. Sikarwar, Ekta, 2022. "Board attributes, hedging activities and exchange rate risk: Multi-country firm-level evidence," Economic Modelling, Elsevier, vol. 110(C).
    7. Hege, Ulrich & Hutson, Elaine & Laing, Elaine, 2021. "Mandatory governance reform and corporate risk management," Journal of Corporate Finance, Elsevier, vol. 68(C).
    8. Entrop, Oliver & Fuchs, Fabian U., 2020. "Foreign exchange rate exposure of companies under dynamic regret," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-40-20, University of Passau, Faculty of Business and Economics.
    9. Muhammad Tahir & Haslindar Ibrahim & Abdul Hadi Zulkafli & Muhammad Mushtaq, 2020. "Influence of Exchange Rate Fluctuations and Credit Supply on Dividend Repatriation Policy of U.S. Multinational Corporations," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 267-290.
    10. Fuchs, Fabian U., 2020. "Macroeconomic determinants of foreign exchange rate exposure," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-42-20, University of Passau, Faculty of Business and Economics.
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    More about this item

    Keywords

    Risk-taking incentives; Managerial compensation; Exchange rate exposure; Risk management; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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