The Journal of Finance

Hedging and Coordinated Risk Management: Evidence from Thrift Conversions

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00041

Catherine Schrand, Haluk Unal

We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that when increases in total risk are costly, firms optimally allocate risk by reducing (increasing) exposure to risks that provide zero (positive) economic rents. Our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion, consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest‐rate risk and increasing credit risk. We provide some evidence that risk‐management activities are related to growth capacity and management compensation structure attained at conversion.

Why Firms Use Currency Derivatives

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb01112.x

CHRISTOPHER GÉCZY, BERNADETTE A. MINTON, CATHERINE SCHRAND

We examine the use of currency derivatives in order to differentiate among existing theories of hedging behavior. Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This result suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuable growth opportunities. Firms with extensive foreign exchange‐rate exposure and economies of scale in hedging activities are also more likely to use currency derivatives. Finally, the source of foreign exchange‐rate exposure is an important factor in the choice among types of currency derivatives.

Taking a View: Corporate Speculation, Governance, and Compensation

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01279.x

CHRISTOPHER C. GÉCZY, BERNADETTE A. MINTON, CATHERINE M. SCHRAND

Using responses to a well‐known confidential survey, we study corporations' use of derivatives to “take a view” on interest rate and currency movements. Characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively; that is, they do not speculate to increase risk by “betting the ranch.” Speculating firms encourage managers to speculate through incentive‐aligning compensation arrangements and bonding contracts, and they use derivatives‐specific internal controls to manage potential abuse. Finally, we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey; they are not.