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How do manager incentives influence corporate hedging?

Author

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  • Bihary, Zsolt
  • Dömötör, Barbara

Abstract

We explain the diversity of corporate hedging behavior in a single model. The hedging ratio is obtained by maximizing expected utility that is a combination of the corporate level utility and a component that models the incentives of the financial manager. We derive a theoretical model that gives back the classic result of the literature if the financial manager has no other incentive than to maximize corporate utility. In the case the financial manager expects that his evaluation will be based exclusively on the financial profit (the profit of the hedging transactions), being risk averse, he decides not to hedge at all. The hedging ratio depends on the weight of these contradictory effects. We test our theoretical results on Hungarian corporate survey data.

Suggested Citation

  • Bihary, Zsolt & Dömötör, Barbara, 2018. "How do manager incentives influence corporate hedging?," Corvinus Economics Working Papers (CEWP) 2018/01, Corvinus University of Budapest.
    • Handle: RePEc:cvh:coecwp:2018/01
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    File URL: https://unipub.lib.uni-corvinus.hu/3360/
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    Cited by:

    1. Dömötör, Barbara & Bihary, Zsolt, 2018. "Menedzserösztönzők hatása a vállalati fedezésre [Manager incentives-based model of corporate hedging]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 701-710.

    More about this item

    Keywords

    corporate hedging; corporate utility; manager incentives;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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