CEO Stock and Option Holdings as a Determinant of Option Hedging by Gold Mining Firms

This paper seeks primarily to analyze CEO holdings of stocks and options in their firm as a determinant of the decision to hedge and the intensity of hedging with option-like securities in the gold mining industry. The findings show that CEO holdings play an important role in the choice and intensity of the use of option-like hedging instruments. In addition, results also show that the intensity of option-like instrument use for hedging is diminished when the CEO is also the chairman of the board. This original finding provides additional insight into the decision making process in this context. Moreover, our results show that when non-hedgeable quantity risk and hedgeable price risk are highly correlated, gold mining firms resort to operational hedging strategies through their production flexibility. Consistent with previous studies, our findings reveal that firm liquidity and profitability are positively related to both the use option-like instruments and the intensity of such use while cost structure and debt are positively related to use intensity. But contrary to previous findings, our results show that company sales are negatively related to the intensity of using option-like hedging instruments and investment opportunities are negatively related to the intensity of such use. Finally, investment opportunities as well as the high correlation between production levels and gold prices seem to have a negative impact on the decision to use option-like hedging in the gold mining industry