Who Is More Likely to Take Precautions: A Research on CEOs’ Characteristics and the Strategic Choice of Derivatives

Abstract

Deepening the marketization reform of interest rate and exchange rate provides conditions for the steady development of interest rate and exchange rate markets, but it objectively requires enterprises to strengthen the management and prevention of risks. At the same time, the development of financial derivative markets prompts enterprises to increase the use of derivative products, and the understanding of derivative products gradually returns to the micro-financial nature of risk management in domestics. Since the Upper Echelons Theory” is proposed, more and more scholars have used different personal characteristics of managers to explain the heterogeneity of enterprise decision-making. Therefore, it is inevitable to analyze the personal characteristics of managers to explore the strategic choice of enterprise derivative products. Who would choose financial derivatives to avoid suffering the uncertainty of the future development of enterprises? This paper uses the derivative as an alternative variable to reflect the risk aversion of the CEO, and establishes the logical connection between the individual characteristics and decision-making behaviors of enterprise managers and derivative risk management. Based on the sample of A-share listed firms between 2013 and 2016 in China, this paper attempts to study the influence of CEOs’ characteristics on the choice of derivative strategies by using Logit Model and Multi-value selection models. We make the following conclusions. Corporate risk management strategies contain the preferences of management. These preferences are shaped by both the personal nature of CEOs and external environments. Female, maintaining the advantage of salary and the sense of pride largely determine the choice of financial derivative strategies of CEOs. Caution, retaining existing pay advantages and focusing on their own reputation encourage CEOs to make risk-averse corporate decisions. Meanwhile, the abilities and levels of management, new officials or not and the differences of enterprise property which are formed by learning will result in the differences of the enterprise risk aversion strategy choices. Managers who have strong abilities will choose to use derivative products which will hedge risks for the sake of the sustainable development of enterprises. However, enterprises without the change of CEOs are more risk averse than those with the change of CEOs. A new official applies strict measures, so new CEOs prefer risks to fight for the performance. This study breaks through the existing understanding of the traditional use of derivative products, expands the existing research paradigm of previous CEOs’ characteristics and risk preference, and enriches the Upper Echelons Theory”. It also provides a theoretical basis for understanding and explaining the micro behavior of Chinese enterprises which are using financial derivatives to avoid risks.