Implications of Executive Hedge Markets for Firm Value Maximization

Bogaçhan Çelen () and Saltuk Özertürk

Journal of Economics & Management Strategy, 2007, vol. 16, issue 2, pages 319-349

Abstract: "This paper analyzes the incentive implications of executive hedge markets. The manager can promise the return from his shares to third parties in exchange for a fixed payment-swap contracts-and/or he can trade a customized security correlated with his firm-specific risk. The customized security improves incentives by diversifying the manager's firm-specific risk. However, unless they are exclusive, swap contracts lead to a complete unraveling of incentives. When security customization is sufficiently high, the manager only trades the customized security-but not any nonexclusive swap contracts, and incentives improve. Access to highly customized hedge securities and/or exclusive swap contracts increases the manager's pay-performance sensitivity". Copyright 2007, The Author(s) Journal Compilation (c) 2007 Blackwell Publishing.

Date: 2007

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