Three Essays on CEO Risk Preferences, and Ability, Corporate Hedging Decisions, and Investor Sentiment
THREE ESSAYS ON CEO RISK PREFERENCES, AND ABILITY, CORPORATE HEDGING DECISIONS, AND FIRM VALUE Sonik Mandal Old Dominion University, 2018 Director: Dr. John A. Doukas The derivative hedging research has looked at why firms and how firms hedge and if it increases value for their shareholders. In this dissertation we investigate the relation between CEO risk preferences and ability and whether if affects their hedging decisions and firm value. In our first essay, we challenge the theory and previous empirical evidence that showed CEO risk preferences affects hedging. Using a sample of Fortune 500 firms and 5 years of panel data, and using inside debt (i.e. CEO pension and deferred compensation) and the CEO Vega and CEO Delta, as proxies of CEO risk preferences, we document that neither risk averse (i.e. debt like compensation) nor risk seeking (i.e. convex compensation) inducing CEO compensation packages influence corporate hedging. Moreover, we find CEOs who have more previous work experience and high job tenure to be positively related to hedging. Essay 2 examines the hedging intensity and market value sensitivity of firms run by CEOs with different risk preferences. We find derivatives hedging intensities of risk seeking and risk averse CEOs to be fairly similar, suggesting that compensation contracts designed to motivate risk seeking (less hedging) behavior do not succeed to alter CEOs' inherent riskaversion. We also find, that if the underline asset prices change by three standard deviations the average firm's derivatives portfolio creates only modest gains for both types of CEOs. These results seem consistent with the view that hedging is just an insurance policy and not a firm value