CEO risk preferences, hedging intensity, and firm value. (February 2023)

• Record Type: Journal Article
• Authors: Chowdhury, Rajib; Doukas, John A.; Mandal, Sonik
• Is Part Of: Journal of international money and finance. Volume 130(2023)
• Publication Date: 2023-02
• Subjects: Derivatives hedging -- Hedging intensity -- Firm value -- CEO risk preferences -- CEO compensation; G30 -- G10 -- G32 -- G02 -- G39 -- G3; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2022.102751
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Derivative hedging increases firm value modesty compared to a firm's overall risk exposure. CEO compensation structures do not have a statistically significant effect the hedging intensities. Our evidence suggests that hedging acts as insurance rather than as a value-increasing strategy. 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.