Optimal Compensation Contract When Managers Can Hedge
This paper examines optimal compensation contracts when executives can hedge their incentive portfolio. Managerial hedging, on one hand, reduces managers incentive to exert effort by unwinding their wealth from firm performance; on the other hand, it enhances their ability to bear risk. In a simple principal-agent framework, I show that the optimal incentive level decreases with the executive hedging cost. Using various measures of the incentive pay and hedging cost, I provide strong empirical evidence supporting the models prediction. Providing further support for the theory, I find that executives hold more exercisable in-the-money options when they can hedge more easily. Moreover, I document evidence that managerial hedging also significantly affects managers corporate policies. Finally, I show that shareholders use higher financial leverage to resolve the executive-hedging problem, besides providing higher-power contracts. Overall, my results suggest that managers ability to hedge firm risk affects compensation packages, as well as corporate decisions.
Executive compensation Hedging Equity incentives
Huasheng Gao
Sauder School of Business University of British Columbia 2053 Main Mall,Vancouver,BC V6T 1Z2
国际会议
大连
英文
1-54
2008-07-02（万方平台首次上网日期，不代表论文的发表时间）