Surveys of corporate risk management document that selective hedging, where managers incorporate their market views into firms’ hedging programs, is widespread in the U.S. and other countries. Stulz (1996) argues that selective hedging could enhance the value of firms that possess an...

This study provides strong evidence of a causal effect of risk-taking incentives provided by option compensation on corporate risk management. We utilize the passage of FAS 123R, which required firms to expense options, to investigate how CEO option compensation affects the hedging behavior of...