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Managerial compensation under privately-observed hedging and earnings management

Author

Listed:
  • Liu, Qi
  • Sun, Bo

Abstract

This paper studies how private information in hedging outcomes affects the design of managerial compensation when hedging instruments serve as a double-edged sword in that they may be used for both corporate hedging and earnings management. On the one hand, financial vehicles can offer customized contracts that are closely tailored to manage specific risk and improve hedging efficiency. On the other hand, involvement in hedging may give rise to manipulation through misstatement of the value estimates. We show that the use of privately-observed hedging may actually require greater pay-for-performance in managerial compensation.

Suggested Citation

  • Liu, Qi & Sun, Bo, 2015. "Managerial compensation under privately-observed hedging and earnings management," Economics Letters, Elsevier, vol. 137(C), pages 1-4.
    • Handle: RePEc:eee:ecolet:v:137:y:2015:i:c:p:1-4
    DOI: 10.1016/j.econlet.2015.10.004
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    References listed on IDEAS

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    1. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-1363, December.
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    6. 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, September.
    7. Sun, Bo, 2014. "Executive compensation and earnings management under moral hazard," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 276-290.
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    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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