Do Managerial Risk-Taking Incentives Influence Firms’ Exchange Rate Exposure?

49 Pages Posted: 14 Aug 2017 Last revised: 3 Oct 2017

See all articles by Bill B. Francis

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Delroy M. Hunter

University of South Florida

Yun Zhu

St. John's University - Department of Economics and Finance

Date Written: August 5, 2017

Abstract

There is scant evidence on how risk-taking incentives impact specific firm risks. This has implications for board oversight of managerial risk taking, firms’ development of comparative advantage in taking particular risks, and compensation design. We examine this question for exchange rate risk. Using multiple identification strategies, we find that vega increases exchange rate exposure for purely domestic and globally engaged firms. Vega’s impact increases with international operations, declines post-SOX, and is robust to firm-level governance. Our results suggest that evidence that exposure reduces firm value can be viewed, in part, as a wealth transfer from shareholders and debt-holders to managers.

Keywords: exchange rate exposure, risk, managerial compensation, risk-taking incentives

JEL Classification: G32

Suggested Citation

Francis, Bill B. and Hasan, Iftekhar and Hunter, Delroy M. and Zhu, Yun, Do Managerial Risk-Taking Incentives Influence Firms’ Exchange Rate Exposure? (August 5, 2017). Bank of Finland Research Discussion Paper No. 16/2017, Available at SSRN: https://ssrn.com/abstract=3016715

Bill B. Francis (Contact Author)

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Delroy M. Hunter

University of South Florida ( email )

Dept of Finance, Muma College of Business
4202 E. Fowler Ave, BSN3403
Tampa, FL 33620
United States
(813) 843-2085 (Phone)
(813) 974-3084 (Fax)

HOME PAGE: http://www.usf.edu/business/contacts/hunter-delroy.aspx

Yun Zhu

St. John's University - Department of Economics and Finance ( email )

Jamaica, NY 11439
United States

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