Risk management should not be the primary concern of a firm operating in an efficient stock market (Modigliani and Miller, 1958). Shareholders can manage their individual risk by holding well-diversified portfolios (Fama, 1980). But managers sometimes operate on the basis that their future earning opportunities will be affected by the continued existence and not necessarily profitability of the firms which they manage, thereby exhibiting agency problems (Coase, 1937;Fama, 1980). In this paper, it is argued that managers operating in corrupt countries will exhibit greater agency problems by acting contrary to shareholders interest and by seeking less risk at the expense of lower returns (Habib and Zurawicki, 2001). We seek to establish the extent of the agency problem based on the level of currency hedging in which managers engage and we argue that in corrupt countries, all other things equal, more hedging will take place, acting counter to (Modigliani and Miller, 1958), as managers act to preserve their personal wealth, in the form of annual salaries, which is closely tied to firm longevity, rather than firm profitability.
This paper examines the effects of the managerial horizon, CEO pay‐performance sensitivity, and CEO firm‐related wealth on earnings management. Using two measures of pay‐performance sensitivity (CEODelta and CEOVega) in our regression analysis, we find that CEO pay‐performance sensitivity significantly affects earnings management in the early years of the CEO's services, not in retirement years. We further examine the earnings management behavior surrounding the retirement years and find that the pay‐performance sensitivity of CEO compensation is negatively associated with earnings management. Furthermore, the closer the retirement year, the lower level of earnings management observed in our sample. Finally, we further examine whether the CEOs’ firm‐related wealth affects earnings management during CEO tenure and find that CEO's firm‐related wealth also has a pronounced effect on earnings management during the CEO tenure.
The objective of this paper is to analyze the relationship between the ownership level of managers and the risk averse behavior of the firm. We measure the ownership level of the managers by the ratio of their ownership of the company relative to their total wealth for a sample of 69 individuals from the Forbes 400 list of the wealthiest individuals in the world for the period from 2001-11 using an unbalanced panel data analysis. The dependent variable is the Altman Z-score of each firm and we further test these relationships using financial leverage. The independent variables are delta and Vega of the option portfolio of the manager, R&D for the firm, total assets, the age of the manager, the tenure of the manager, stock holding of the manager, CEO/Chair duality of the manager and firma age. The Z-score is statistically significantly related to size, CEO age, CEO wealth, and duality. Financial leverage is not statistically significantly related to any of the independent variables.
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