 Production and hedging implications of executive compensation schemesSagi Akron and Simon Benninga Journal of Corporate Finance, 2013, vol. 19, issue C, 119-139 Abstract: This paper connects executive compensation with hedging and analyzes a crucial shareholders and managers agency source that evolves from the pricing of the hedging device. The shareholders are risk-neutral, while the risk-averse manager hedges the price risk of the manufactured quantity, and his compensation package includes equity-linked compensation-stock grants. Only when the hedging instrument's pricing includes a risk premium, hedging is costly to the shareholders, while it is costless to the manager. Then from the owners' point of view, we observe managerial over-hedging, increasing in the equity-linked compensation level. This result leads to a violation of the classical production and hedging separation theorem. We conclude that, in the case where the hedging device's pricing bears a risk premium, shareholders can regulate the corporate value diversion to managers through diminishing the managerial equity-linked compensation scheme or by putting restrictions on the extent of hedging activities of executives. Keywords: Optimal managerial compensation scheme; Corporate hedging devices; Executive equity-linked compensation; Frictions; Regulation; Separation theorems (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:19:y:2013:i:c:p:119-139 DOI: 10.1016/j.jcorpfin.2012.10.004 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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