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Corporate derivative use and the composition of CEO compensation

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  • Supanvanij, Janikan
  • Strauss, Jack

Abstract

This paper analyzes whether the composition of a CEO's compensation package and SFAS 133, a regulation designed to increase transparency of derivative reporting, affect a firm's use of interest rate and currency derivatives to hedge risk. Using a panel of S&P500 firms during 1994-2000, we demonstrate the importance of properly aligning CEO incentives with derivative use. Results demonstrate that hedging is positively related to long-term CEO compensation, and negatively related to short-term CEO compensation as well as exercisable options compensation. We also show that changes in derivative reporting influence the relationship between CEO compensation and derivative use. Our paper thus highlight that CEO incentives and derivative reporting transparency are a significant factor in determining a firm's hedging use.

Suggested Citation

  • Supanvanij, Janikan & Strauss, Jack, 2010. "Corporate derivative use and the composition of CEO compensation," Global Finance Journal, Elsevier, vol. 21(2), pages 170-185.
    • Handle: RePEc:eee:glofin:v:21:y:2010:i:2:p:170-185
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    4. Quang Nguyen & Trang Kim & Marina Papanastassiou, 2018. "Policy uncertainty, derivatives use, and firm-level FDI," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(1), pages 96-126, January.

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    Keywords

    Compensation Hedging;

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