Scandinavian Working Papers in Economics

Knut Wicksell Working Paper Series,
Lund University, Knut Wicksell Centre for Financial Studies

No 2014/3: CEO Age, Risk Incentives and Hedging Instrument Choice

Ettore Croci () and Håkan Jankensgård ()

Abstract: We analyze how firms hedge in the oil and gas industry. Our main finding is that CEO age determines hedging behavior. The probability of being a hedger as well as the use of linear hedging strategies decreases with CEO age. These results are consistent with an argument that financial distress, which sends a negative signal of managerial ability, is relatively more costly to younger CEOs. We also investigate the vega-theory of hedging instrument choice, finding some support for a negative relationship between vega and a) the use of derivatives and b) hedging strategies that include the sale of call options.

Keywords: Vega; executive compensation; hedging; options; CEO age

JEL-codes: G30; G32

46 pages, May 28, 2014

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