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Do managerial risk-taking incentives influence firms' exchange rate exposure?

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  • Francis, Bill B.
  • Hasan, Iftekhar
  • Hunter, Delroy M.
  • Zhu, Yun

Abstract

There is scant evidence on how risk-taking incentives impact specific firm risks. This has implications for board oversight of managerial risk taking, firms' development of comparative advantage in taking particular risks, and compensation design. We examine this question for exchange rate risk. Using multiple identification strategies, we find that vega increases exchange rate exposure for purely domestic and globally engaged firms. Vega's impact increases with international operations, declines post-SOX, and is robust to firm-level governance. Our results suggest that evidence that exposure reduces firm value can be viewed, in part, as a wealth transfer from shareholders and debt-holders to managers.

Suggested Citation

  • Francis, Bill B. & Hasan, Iftekhar & Hunter, Delroy M. & Zhu, Yun, 2017. "Do managerial risk-taking incentives influence firms' exchange rate exposure?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 154-169.
    • Handle: RePEc:eee:corfin:v:46:y:2017:i:c:p:154-169
    DOI: 10.1016/j.jcorpfin.2017.06.015
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    More about this item

    Keywords

    Risk-taking incentives; Managerial compensation; Exchange rate exposure; Risk management; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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