Who times the foreign exchange market? Corporate speculation and CEO characteristics

Abstract

This paper shows that managers' personal beliefs and individual characteristics explain a large share of the substantial time-variation of derivatives use beyond firm, industry, and market fundamentals. We construct a panel data set of foreign currency derivatives holdings and currency exposures for U.S. non-financial firms. We use a novel approach to build a firm-specific foreign exchange return. We find that managers adjust derivatives notional amounts in response to past foreign exchange returns, as if they were forming views on future currency prices. We then construct an empirical measure of speculative behavior for each firm to investigate the profile of the speculator. Firms where the CEO holds an MBA degree, is younger, and has less previous working experience speculate more. These results are consistent with overconfident managers taking more risk.

Does Managerial Power Increase Selective Hedging? Evidence from the Oil and Gas Industry

“…The overconfidence-interpretation relates to Adam et al (2015), who show that managers exhibit hedging behavior over time that is consistent with overconfidence. A similar conclusion is found in Beber and Fabbri's (2012) study, who analyze how selective hedging relates to CEO characteristics like education and age. Stulz's (1996) theory of selective hedging finds support in the data in that leverage decreases selective hedging, but firm size increases it.…”

Derivative usage and firm value: The influence of agency costs and monitoring problems

“…A few studies document that managers often incorporate their views into their hedging programs at the expense of shareholders (e.g., Dolde, 1993;Bodnar et al, 1998;Dhanajarata, Kumar, and Rabinovitch, 2010;Beber and Fabbri, 2005;Faulkender, 2005;Geczy et al, 2007). These findings also complement Baker et al (2005), who provide a survey of behavioral approaches to corporate finance in helping to explain some corporate policies.…”

Does Manager Ability Influence Prospectus Earnings Quality and IPO Underpricing?

“…MA-Score is the residual from the estimation of the firm efficiency model, which Demerjian et al 2012 (Beber & Fabbri, 2012;Iqbal, 2015), which further supports its use as our primary manager ability measure. The Demerjian et al (2012) measure of manager ability focuses on the operational and industry knowledge of managers as the primary source of their ability.…”