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 affect 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.

Do peer firms influence innovation?

“…In addition, the Wald Test of Exogeneity is significant in all cases, indicating sufficient evidence to reject the null hypothesis of exogeneity. In our case, the significant Wald Test of Exogeneity suggests that peer firm averages are not exogenous, hence, the need to address potential endogeneity issues via instrumental variables (IV) estimations (see Baum et al, 2003Baum et al, , 2007Huang et al, 2018;Xing et al, 2020). Moreover, the Hansen J-Statistic is small in all our models, suggesting that the null is not rejected and overidentification restrictions are valid (see Sargan, 1958;Baum et al, 2007;Roodman, 2006).…”

Are boards' risk management committees associated with firms’ environmental performance?

“…In addition to PSM regression, we use an IV-GMM regression to re-test H2 to address possible reverse causality and omitted variable concerns. We prefer the GMM method to the two-stage least squares (2SLS) as GMM provides reliable estimates for inferences from different types of datasets (Hansen, 1982) and the predicted values under 2SLS may not be efficient even if they are consistent (Greene, 2012;Huang et al, 2018).…”

“…To mitigate against any possible concerns regarding reverse causality and omitted variables, we use an IV-GMM regression (Huang et al, 2018). Following Wang, Duan and Liu (2021) and Banker, Huang & Natarajan (2011), we select the mean of human capital of RMC in the same industry and year as the instrumental variable (INDUS_HCRMC), as the human capital of RMCs at the firm level tends to converge around the industry average (Lev & Sougiannis, 1996).…”

“…First, following Huang et al (2018), we use instrumental variables-generalised method of moments (IV-GMM) estimations to address possible concerns regarding reverse causality and omitted variables. Second, following Liang and Renneboog (2017) and Dyck et al (2019), we use the Deepwater Horizon oil spill in 2010 as an exogenous environmental shock to mitigate endogeneity concerns.…”

Stock mispricing, hard-to-value stocks and the influence of internet stock message boards

“…allows us to deal with potential endogeneity concerns (Huang et al, 2018). Endogeneity may be a concern in our estimations since portfolio returns and firm characteristics may be endogenous.…”