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The Ethics of Hedging by Executives

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  • Lee Dunham
  • Ken Washer

Abstract

Executives of many publicly held firms agree to compensation packages that create immense exposure to their employer’s stock. Corporate boards, aspiring to motivate executives to make value-maximizing decisions, often tie an executive’s earnings to stock price performance through stock or option awards. However, this engenders a significant ethical dilemma for many executives who are uncomfortable with sizable, firm-specific risk and desire to reduce it through hedging activities. Recent research has shown that executive hedging has become more prevalent. In essence, managers are unwinding the acute economic incentive to act in the best interest of the owners. This appears to violate the spirit of the compensation contract and from a normative standpoint, is not how executives should act. In this article, we describe how some executives are acting in regard to this issue (descriptive ethics), how they should act (normative ethics) and how they can be helped to get from what they are doing, to what they should be doing (prescriptive ethics). Copyright Springer Science+Business Media B.V. 2012

Suggested Citation

  • Lee Dunham & Ken Washer, 2012. "The Ethics of Hedging by Executives," Journal of Business Ethics, Springer, vol. 111(2), pages 157-164, December.
    • Handle: RePEc:kap:jbuset:v:111:y:2012:i:2:p:157-164
    DOI: 10.1007/s10551-011-1198-x
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    Cited by:

    1. Marco Heimann & Étienne Mullet & Jean-François Bonnefon, 2015. "Peoples’ Views About the Acceptability of Executive Bonuses and Compensation Policies," Journal of Business Ethics, Springer, vol. 127(3), pages 661-671, March.
    2. Jongwon Park & Sunyoung Kim & Albert Tsang, 2023. "CEO Personal Hedging and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 182(1), pages 199-221, January.
    3. Lee M. Dunham, 2018. "Does a CEO’s hedging ability affect the firm’s capital structure?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 615-630, July.
    4. Stefano Colonnello & Giuliano Curatola & Shuo Xia, 2024. "When Does Linking Pay to Default Reduce Bank Risk?," Working Papers 2024: 07, Department of Economics, University of Venice "Ca' Foscari".

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