Monitoring Mechanisms, Managerial Incentives, Investment Distortion Costs, and Derivatives Usage

Jingjing Huang; Chen Su; Nathan L Joseph; Dudley Gilder

doi:10.1016/j.bar.2017.11.004

Monitoring Mechanisms, Managerial Incentives, Investment Distortion Costs, and Derivatives Usage

Jingjing Huang, Chen Su, Nathan L Joseph, Dudley Gilder

Research output: Contribution to journal › Article › peer-review

Abstract

We relate derivatives usage to the level of corporate governance/monitoring mechanisms, managerial incentives and investment decisions of UK firms. We find evidence to suggest that the monitoring environment, e.g., board size, influences the use of both currency and interest rate derivatives usage. Managerial compensation also influences derivatives usage. Investment decisions are affected by the governance and
managerial compensation of firms, which in turn impact on derivatives usage. We find a strong tendency for UK firms to reduce derivatives usage in situations where derivatives usage should be increased. There is limited evidence that firms use hedging substitutes to avoid monitoring from external capital markets.

Original language	English
Pages (from-to)	93-141
Journal	British Accounting Review
Volume	50
Issue number	1
Early online date	24 Dec 2017
DOIs	https://doi.org/10.1016/j.bar.2017.11.004
Publication status	Published - 1 Jan 2018

Bibliographical note

Keywords

Corporate hedging
corporate governance (CG)
agency problem
under/overinvestment
logistic regression

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10.1016/j.bar.2017.11.004

Monitoring mechanisms, managerial incentives, investment distortion costs, and
© 2017, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International
Accepted author manuscript, 0.98 MBLicence: CC BY-NC-ND 3.0

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title = "Monitoring Mechanisms, Managerial Incentives, Investment Distortion Costs, and Derivatives Usage",

abstract = "We relate derivatives usage to the level of corporate governance/monitoring mechanisms, managerial incentives and investment decisions of UK firms. We find evidence to suggest that the monitoring environment, e.g., board size, influences the use of both currency and interest rate derivatives usage. Managerial compensation also influences derivatives usage. Investment decisions are affected by the governance andmanagerial compensation of firms, which in turn impact on derivatives usage. We find a strong tendency for UK firms to reduce derivatives usage in situations where derivatives usage should be increased. There is limited evidence that firms use hedging substitutes to avoid monitoring from external capital markets.",

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N2 - We relate derivatives usage to the level of corporate governance/monitoring mechanisms, managerial incentives and investment decisions of UK firms. We find evidence to suggest that the monitoring environment, e.g., board size, influences the use of both currency and interest rate derivatives usage. Managerial compensation also influences derivatives usage. Investment decisions are affected by the governance andmanagerial compensation of firms, which in turn impact on derivatives usage. We find a strong tendency for UK firms to reduce derivatives usage in situations where derivatives usage should be increased. There is limited evidence that firms use hedging substitutes to avoid monitoring from external capital markets.

AB - We relate derivatives usage to the level of corporate governance/monitoring mechanisms, managerial incentives and investment decisions of UK firms. We find evidence to suggest that the monitoring environment, e.g., board size, influences the use of both currency and interest rate derivatives usage. Managerial compensation also influences derivatives usage. Investment decisions are affected by the governance andmanagerial compensation of firms, which in turn impact on derivatives usage. We find a strong tendency for UK firms to reduce derivatives usage in situations where derivatives usage should be increased. There is limited evidence that firms use hedging substitutes to avoid monitoring from external capital markets.

KW - Corporate hedging

KW - corporate governance (CG)

KW - agency problem

KW - under/overinvestment

KW - logistic regression

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JO - British Accounting Review

JF - British Accounting Review

IS - 1

ER -

Monitoring Mechanisms, Managerial Incentives, Investment Distortion Costs, and Derivatives Usage

Abstract

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Keywords

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