Abstract
I examine whether a CEO’s composition of firm stockholdings between restricted and unrestricted shares impacts the amount of leverage carried by the firm. I document a negative and statistically significant relationship between leverage and the proportion of CEO total shareholdings that are unrestricted, and this negative relationship holds for alternative measures of leverage. This result supports the notion that the composition of a CEO’s portfolio of firm stock between restricted and unrestricted shares is a significant determinant of leverage ratios.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Factors documented to explain firm risk across firms include characteristics such as firm size, growth, profitability, capital investment, capital structure, payout ratio, and firm diversification (number of different business segments).
References
Amihud Y, Lev B (1981) Risk reduction as a managerial motive for conglomerate mergers. Bell J Econ 12:605–617
Bettis J, Bizjak J, Lemmon M (2001) Managerial ownership, incentive contracting, and the use of zero-cost collars and equity swaps by corporate insiders. J Financ Quant Anal 36:345–370
Bettis J, Bizjak J, Kalpathy S (2015) Why do insiders hedge their ownership and options? An empirical examination. Financ Manag 44:655–683
Bolster P, Chance D, Rich D (1996) Executive equity swaps and corporate insider holdings. Financ Manag 25:14–24
Coles J, Daniel N, Naveen L (2006) Managerial incentives and risk-taking. J Financ Econ 79:431–468
Dash E (2011) Stock-hedging lets bankers skirt efforts to overhaul pay. New York Times (February 5). Available at: http://dealbook.nytimes.com/2011/02/05/stock-hedging-lets-bankers-skirt-efforts-to-overhaul-pay/?hp&_r.0
Dunham L (2012) Managerial hedging ability and firm risk. J Econ Financ 36:882–889
Dunham L, Washer K (2012) The ethics of hedging by executives. J Bus Ethics 111:157–164
Fama E, MacBeth JD (1973) Risks, return and equilibrium: empirical tests. J Polit Econ 81:607–636
Frank MZ, Goyal VK (2009) Capital structure decisions: which factors are reliably important? Financ Manag 38:1–37
Graham JR (2000) How big are the tax benefits of debt? J Financ 55:1901–1941
Jagolinzer A, Matsunaga S, Yeung E (2007) An analysis of insiders’ use of prepaid variable forward transactions. J Account Res 45:1055–1079
Kelly K (2007) Executives hedge their own IPOs. Wall Street J. https://www.wsj.com/articles/SB117643048409868674
Leary MT, Roberts MR (2014) Do peer firms affect corporate financial policy? J Financ 69:139–178
May D (1995) Do managerial motives influence firm risk reduction strategies? J Financ 50:1291–1244
O’Brian B (1997) Help abounds for cash-poor yet stock rich. Wall Street J, April 30.
Rajan R, Zingales L (1995) What do we know about capital structure: some evidence from international data. J Financ 50:1421–1460
Sasseen J (2010) Some CEOs are selling their companies short. Businessweek (February 25). Available at: http://www.bloomberg.com/bw/magazine/content/10_10/b4169044647894.htm
Smith CW, Stulz RM (1985) The determinants of firms’ hedging policies. J Financ Quant Anal 20:391–405
Titman S, Wessels R (1988) The determinants of capital structure choice. J Financ 43:1–21
Yost B (2017) Locked-in: the effect of CEOs’ capital gains taxes on corporate risk taking. Forthcoming in The Accounting Review. https://ssrn.com/abstract=2985765
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Dunham, L.M. Does a CEO’s hedging ability affect the firm’s capital structure?. J Econ Finan 42, 615–630 (2018). https://doi.org/10.1007/s12197-017-9415-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-017-9415-9
Keywords
- Executive compensation
- Managerial hedging
- Firm risk
- Restricted stock
- Unrestricted stock
- Capital structure