Corporate Hedging and the Design of Incentive-Compensation Contracts

• Main Authors: ARMSTRONG, Chris, Sterling HUANG
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: executive compensation; contract design; equity incentives; risk-taking incentives; stock options; derivatives; hedging; natural experiment; Accounting; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/soa_research/1520; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=2547&context=soa_research
• Institution: Singapore Management University

We use the introduction of exchange-traded weather derivative contracts as a natural experiment to examine the relation between risk and incentives. In particular, we examine how executives’ ability to hedge uncontrollable weather-related risk that was previously difficult and costly to manage influ...