MANAGERIAL INCENTIVES AND THE USE OF FOREIGN‐EXCHANGE DERIVATIVES BY BANKS

Lee C. Adkins

53 citations0/0 files storedThe Journal of Financial Research

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Risk Management in Financial Firms Banking stability, regulation, efficiency Corporate Finance and Governance

Abstract

Abstract We examine the effect of managerial compensation and ownership on the use of foreign‐exchange derivatives by U.S. bank holding companies. We focus on derivatives used for purposes other than trading to investigate derivative use in a hedging framework. We use instrumental variables probit and sample‐selection models to estimate the effects of endogenous and exogenous factors on the probability and extent of foreign‐exchange derivatives used. We find that the use of derivatives is inversely related to option awards but positively related to managerial ownership. Finally, our results suggest that ownership by large institutional shareholders provides incentive for managers to hedge.

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References

1973The Pricing of Options and Corporate Liabilities 1986Large Shareholders and Corporate Control 1985The Determinants of Firms' Hedging Policies 1993Risk Management: Coordinating Corporate Investment and Financing Policies 1977An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory 1971Some Statistical Models for Limited Dependent Variables with Application to the Demand for Durable Goods 1998Agency Costs, Risk Management, and Capital Structure 1996Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry

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