Walking the Walk: Selective Hedging and Inside Ownership

Abstract

Firms commonly engage in a practice known as ‘selective hedging’, i.e. adjusting the timing and size of hedging programs based on market views. In this paper I examine if corporate governance arrangements influence the extent of selective hedging using hand-collected data from the oil and gas industry. I find that selective hedging increases in inside ownership, suggesting that managers hedge more selectively when outside monitoring is weak. It also suggests that managers are confident since they are betting money that is to some extent their own. Selective hedging is associated with lower realized derivative cash flows and lower firm value, however, suggesting that these managers are prone to over-confidence.