User menu

Accès à distance ? S'identifier sur le proxy UCLouvain

Implications of Executive Hedge Markets for Firm Value Maximization

Primary tabs

Celen, Bogaçhan [Graduate School of Business Columbia University New York] Ozerturk, Saltuk [UCL]

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.

Document type Article de périodique (Journal article)
Publication date 2007
Language Anglais
Journal information "Journal of Economics & Management Strategy" - Vol. 16, no. 2, p. 319-349 (2007)
Peer reviewed yes
Publisher Wiley-Blackwell Publishing, Inc. (Malden, USA)
issn 1058-6407
e-issn 1530-9134
Publication status Publié
Affiliations Graduate School of Business Columbia University New York
UCL - EUEN/CORE - Center for operations research and econometrics
Links
  1. V. Acharya, and A. Bisin , 2005 , "Managerial Hedging, Equity Ownership and Firm Value ," Mimeo, New York University.
  2. Allen Franklin, Repeated principal-agent relationships with lending and borrowing, 10.1016/0165-1765(85)90121-1
  3. Aggarwal Rajesh K., Samwick Andrew A., The Other Side of the Trade‐Off: The Impact of Risk on Executive Compensation, 10.1086/250051
  4. Amihud Yakov, Lev Baruch, Risk Reduction as a Managerial Motive for Conglomerate Mergers, 10.2307/3003575
  5. Antle Rick, Smith Abbie, An Empirical Investigation of the Relative Performance Evaluation of Corporate Executives, 10.2307/2490802
  6. Bank S.A., DePaul Business Law Journal, 301 (1995)
  7. Bebchuk Lucian Arye, Fried Jesse M, Executive Compensation as an Agency Problem, 10.1257/089533003769204362
  8. Bettis J. Carr, Bizjak John M., Lemmon Michael L., Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders, 10.2307/2676287
  9. Bisin Alberto, Guaitoli Danilo, Moral Hazard and Nonexclusive Contracts, 10.2307/1593693
  10. Bisin Alberto, Rampini Adriano A., Markets as beneficial constraints on the government, 10.1016/j.jpubeco.2005.04.003
  11. A. Bisin, P. Gottardi, and A. Rampini , 2006 , "Managerial Hedging and Portfolio Monitoring ," Mimeo, New York University.
  12. Bizer David S., DeMarzo Peter M., Optimal Incentive Contracts When Agents Can Save, Borrow, and Default, 10.1006/jfin.1999.0275
  13. Bizer David S., DeMarzo Peter M., Sequential Banking, 10.1086/261806
  14. Bolster Paul, Chance Don, Rich Don, Executive Equity Swaps and Corporate Insider Holdings, 10.2307/3665986
  15. Conyon Martin J., Murphy Kevin J., The Prince and the Pauper? CEO Pay in the United States and United Kingdom, 10.1111/1468-0297.00577
  16. F. Easterbrook, and Derivatives and Corporate Governance , 2002 , University of Chicago Law Review Symposium.
  17. The Economist, Executive Relief, 64 (1999)
  18. Franke Günter, Stapleton Richard C., Subrahmanyam Marti G., Who Buys and Who Sells Options: The Role of Options in an Economy with Background Risk, 10.1006/jeth.1998.2420
  19. Garvey Gerald T., The principal—agent problem when the agent has access to outside markets, 10.1016/0165-1765(93)90034-a
  20. Garvey Gerald, Milbourn Todd, Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section, 10.1111/1540-6261.00577
  21. Ip G., Wall Street Journal (1997)
  22. Jensen Michael C., Murphy Kevin J., Performance Pay and Top-Management Incentives, 10.1086/261677
  23. Kahn Charles M., Mookherjee Dilip, Market failure with moral hazard and side trading, 10.1016/0047-2727(94)01467-3
  24. Kahn Charles M., Mookherjee Dilip, Competition and Incentives with Nonexclusive Contracts, 10.2307/2556099
  25. Jensen Michael C., Murphy Kevin J., Performance Pay and Top-Management Incentives, 10.1086/261677
  26. Jin Li, CEO compensation, diversification, and incentives, 10.1016/s0304-405x(02)00150-2
  27. Lambert Richard A., Executive Effort and Selection of Risky Projects, 10.2307/2555629
  28. Lavalle L., Business Week, 15, 70 (2001)
  29. May Don O., Do Managerial Motives Influence Firm Risk Reduction Strategies?, 10.2307/2329353
  30. Morgenson G., Forbes (1998)
  31. Ofek Eli, Yermack David, Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership, 10.1111/0022-1082.00250
  32. Ozerturk Saltuk, Financial innovations and managerial incentive contracting, 10.1111/j.0008-4085.2006.00354.x
  33. Parlour C., American Economic Review, 91, 1311 (2001)
  34. Schizer David M., Executives and Hedging: The Fragile Legal Foundation of Incentive Compatibility, 10.2307/1123473
  35. Stulz Rene M., Optimal Hedging Policies, 10.2307/2330894
  36. Tufano Peter, Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry, 10.2307/2329389
Bibliographic reference Celen, Bogaçhan ; Ozerturk, Saltuk. Implications of Executive Hedge Markets for Firm Value Maximization. In: Journal of Economics & Management Strategy, Vol. 16, no. 2, p. 319-349 (2007)
Permanent URL http://hdl.handle.net/2078.1/23619