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The effect of managerial bonus plans on corporate derivatives usage

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  • Kim, Young Sang
  • Nam, Jouahn
  • Thornton Jr., John H.

Abstract

This paper examines the effect of risk management incentives resulting from managerial bonus plans on firms' derivatives usage. Partitioning the sample into firms whose managers are more likely to face convexity or concavity in the bonus payoff function, we find a negative relation between bonus plans and derivatives usage for firms in the convex region and a positive relation for firms in the concave region. These results provide evidence that the incentives inherent in managerial bonus plans cause managers to increase or decrease firm risk in order to maximize their expected bonus payments.

Suggested Citation

  • Kim, Young Sang & Nam, Jouahn & Thornton Jr., John H., 2008. "The effect of managerial bonus plans on corporate derivatives usage," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 229-243, July.
    • Handle: RePEc:eee:mulfin:v:18:y:2008:i:3:p:229-243
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    1. Jiang, Wei & Adams, Mike & Jia-Upreti, Joy, 2012. "Does managerial entrenchment motivate the insurance decision?," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 117-128.
    2. Jiyeon Yun & James M. Carson & David L. Eckles, 2023. "Executive compensation and corporate risk management," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(2), pages 521-557, June.
    3. Jens Hagendorff & Francesco Vallascas, 2012. "CEO Pay and Risk-taking in Banking: The Roles of Bonus Plans and Deferred Compensation in Curbing Bank Risk-taking," Chapters, in: James R. Barth & Chen Lin & Clas Wihlborg (ed.), Research Handbook on International Banking and Governance, chapter 9, Edward Elgar Publishing.

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