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| Author: | Gao, H. |
| Title: | Optimal compensation contracts when managers can hedge |
| Journal: | Journal of Financial Economics
2010 : AUG, VOL 97:2, p. 218-238 |
| Index terms: | hedging executive remuneration equity capital incentives |
| Language: | eng |
| Abstract: | The purpose of the article is to study optimal compensation contracts when managers have the possibility to hedge their portfolios. A principal-agent framework is developed, and it demonstrates a decrease in a CEO's pay-performance sensitivity when the executive-hedging cost decreases. Empirical evidence is provided to support the frameworks prediction, showing that executives that have lower hedging costs hold more in-the-money options, have weaker incentives to cut dividends and seek less corporate diversification. The findings support the notion that governance mechanisms and managerial actions are influenced by the CEO's ability to hedge their portfolios. |
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