How do manager incentives influence corporate hedging?

Zsolt Bihary and Barbara Dömötör ()

Corvinus Economics Working Papers (CEWP) from Corvinus University of Budapest

Abstract: We explain the diversity of corporate hedging behavior in a single model. The hedging ratio is obtained by maximizing expected utility that is a combination of the corporate level utility and a component that models the incentives of the financial manager. We derive a theoretical model that gives back the classic result of the literature if the financial manager has no other incentive than to maximize corporate utility. In the case the financial manager expects that his evaluation will be based exclusively on the financial profit (the profit of the hedging transactions), being risk averse, he decides not to hedge at all. The hedging ratio depends on the weight of these contradictory effects. We test our theoretical results on Hungarian corporate survey data.

Keywords: corporate hedging; corporate utility; manager incentives (search for similar items in EconPapers)
JEL-codes: F13 G32 G34 (search for similar items in EconPapers)
Date: 2018-02-26
New Economics Papers: this item is included in nep-cfn, nep-rmg, nep-tra and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cvh:coecwp:2018/01

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