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The Influence Of Firm‐ And Ceo‐Specific Characteristics On The Use Of Nonlinear Derivative Instruments

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  • Pinghsun Huang
  • Harley E. Ryan
  • Roy A. Wiggins

Abstract

We examine why firms use nonlinear derivatives (e.g., options). Our results suggest that option characteristics in investment opportunities and debt, the payoff structure of incentive compensation, and free cash‐flow agency problems influence the firm's choice. Investment opportunities, internally generated cash flow, business risk, and option compensation positively influence the use of nonlinear currency derivatives. Option feature in bonds positively influence the use of nonlinear interest rate derivatives, whereas bonus and stock compensation, and CEO tenure have a negative influence. In sum, nonlinear cash flow characteristics in investment opportunity, debt, and executive compensation all relate positively to nonlinear derivative usage.

Suggested Citation

  • Pinghsun Huang & Harley E. Ryan & Roy A. Wiggins, 2007. "The Influence Of Firm‐ And Ceo‐Specific Characteristics On The Use Of Nonlinear Derivative Instruments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(3), pages 415-436, September.
    • Handle: RePEc:bla:jfnres:v:30:y:2007:i:3:p:415-436
    DOI: 10.1111/j.1475-6803.2007.00221.x
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    Cited by:

    1. Koziol, Philipp, 2014. "Inflation and interest rate derivatives for FX risk management: Implications for exporting firms under real wealth," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 459-472.
    2. Huang, Pinghsun & Zhang, Yan & Deis, Donald R. & Moffitt, Jacquelyn S., 2009. "Do artificial income smoothing and real income smoothing contribute to firm value equivalently?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 224-233, February.
    3. Chiraz Ben Ali & Frederic Teulon, 2014. "CEO Monitoring and board effectiveness: Resolving CEO compensation issue," Working Papers 2014-45, Department of Research, Ipag Business School.
    4. Dennis Frestad, 2009. "Why Most Firms Choose Linear Hedging Strategies," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(2), pages 157-167, June.
    5. repec:ipg:wpaper:2014-045 is not listed on IDEAS
    6. Frestad, Dennis, 2010. "Convex costs and the hedging paradox," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 236-242, April.
    7. Dionne, Georges & Ouederni, Karima, 2011. "Corporate risk management and dividend signaling theory," Finance Research Letters, Elsevier, vol. 8(4), pages 188-195.
    8. Frestad, Dennis, 2010. "Corporate hedging under a resource rent tax regime," Energy Economics, Elsevier, vol. 32(2), pages 458-468, March.
    9. Korn, Olaf & Merz, Alexander, 2016. "How to hedge if the payment date is uncertain?," CFR Working Papers 07-14 [rev.], University of Cologne, Centre for Financial Research (CFR).
    10. Liew, Chee Yoong & Ko, Young Kyung & Song, Bee Lian & Murthy, Saraniah Thechina, 2019. "Directors’ remuneration, expropriation and firm performance in Malaysia: evidence from non-executive directors’ service duration within the remuneration committee," MPRA Paper 99703, University Library of Munich, Germany.
    11. Pinghsun Huang & Timothy Louwers & Jacquelyn Moffitt & Yan Zhang, 2008. "Ethical Management, Corporate Governance, and Abnormal Accruals," Journal of Business Ethics, Springer, vol. 83(3), pages 469-487, December.
    12. Arnold, Matthias M. & Rathgeber, Andreas W. & Stöckl, Stefan, 2014. "Determinants of corporate hedging: A (statistical) meta-analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 443-458.
    13. Geyer-Klingeberg, Jerome & Hang, Markus & Rathgeber, Andreas W., 2019. "What drives financial hedging? A meta-regression analysis of corporate hedging determinants," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 203-221.

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