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Managerial hedging and portfolio monitoring

Publication ,  Journal Article
Bisin, A; Gottardi, P; Rampini, AA
Published in: Journal of the European Economic Association
March 1, 2008

Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their firms. We study the agency problem between shareholders and a manager when the manager can hedge his compensation using financial markets and shareholders can monitor the manager's portfolio in order to keep him from hedging, but monitoring is costly. We find that the optimal incentive compensation and governance provisions have the following properties: (i) the manager's portfolio is monitored only when the firm performs poorly, (ii) the manager's compensation is more sensitive to firm performance when the cost of monitoring is higher or when hedging markets are more developed, and (iii) conditional on the firm's performance, the manager's compensation is lower when his portfolio is monitored, even if no hedging is revealed by monitoring. Moreover, the model suggests that the optimal level of portfolio monitoring is higher for managers of firms whose performance can be hedged more easily, such as large firms and firms in more developed financial markets. © 2008 by the European Economic Association.

Duke Scholars

Published In

Journal of the European Economic Association

DOI

EISSN

1542-4774

ISSN

1542-4766

Publication Date

March 1, 2008

Volume

6

Issue

1

Start / End Page

158 / 209

Related Subject Headings

  • Economics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3801 Applied economics
  • 14 Economics
 

Citation

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Bisin, A., Gottardi, P., & Rampini, A. A. (2008). Managerial hedging and portfolio monitoring. Journal of the European Economic Association, 6(1), 158–209. https://doi.org/10.1162/JEEA.2008.6.1.158
Bisin, A., P. Gottardi, and A. A. Rampini. “Managerial hedging and portfolio monitoring.” Journal of the European Economic Association 6, no. 1 (March 1, 2008): 158–209. https://doi.org/10.1162/JEEA.2008.6.1.158.
Bisin A, Gottardi P, Rampini AA. Managerial hedging and portfolio monitoring. Journal of the European Economic Association. 2008 Mar 1;6(1):158–209.
Bisin, A., et al. “Managerial hedging and portfolio monitoring.” Journal of the European Economic Association, vol. 6, no. 1, Mar. 2008, pp. 158–209. Scopus, doi:10.1162/JEEA.2008.6.1.158.
Bisin A, Gottardi P, Rampini AA. Managerial hedging and portfolio monitoring. Journal of the European Economic Association. 2008 Mar 1;6(1):158–209.
Journal cover image

Published In

Journal of the European Economic Association

DOI

EISSN

1542-4774

ISSN

1542-4766

Publication Date

March 1, 2008

Volume

6

Issue

1

Start / End Page

158 / 209

Related Subject Headings

  • Economics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3801 Applied economics
  • 14 Economics