CEO risk preferences, hedging intensity, and firm value

Rajib Chowdhury, John A. Doukas and Sonik Mandal

Journal of International Money and Finance, 2023, vol. 130, issue C

Abstract: We examine the effect of hedging with different derivative instruments on the market value of firms run by CEOs with different risk preferences – based on a noble dataset over five years. We focus on the interest rate, commodity, and foreign exchange derivatives and find striking similarities in the hedging intensities of risk-seeking and risk-averse CEOs. Our findings show that when the average firm experiences an extreme (three-standard-deviation) change in interest rates, commodity prices, or foreign exchange rates, its derivatives portfolio creates only modest gains, regardless of CEO risk preferences. These findings are consistent with the view that hedging is just an insurance policy, not a value-increasing strategy. Our results suggest that CEOs, irrespective of their different risk preferences, are unwilling to forgo wealth-creating projects to hedge corporate risks.

Keywords: Derivatives hedging; Hedging intensity; Firm value; CEO risk preferences; CEO compensation (search for similar items in EconPapers)
JEL-codes: G02 G10 G3 G30 G32 G39 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:130:y:2023:i:c:s0261560622001541

DOI: 10.1016/j.jimonfin.2022.102751

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