Industry Tournament Incentives and Corporate Hedging Policies

This paper examines how a tournament among CEOs to progress within the CEO labor market changes their tendency toward corporate hedging policies. We exploit the textual analysis of 10-Ks to generate corporate hedging proxies. We find that the likelihood and intensity to hedge increases as the CEO labor market tournament prizes augment. We explore the mitigating impacts of corporate hedging on the adverse effects of risk-inducing ITIs on the cost of debt and stock price crash risk, which could be the possible reasons for the relation. Also, the relation between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and when CEOs are the founders or of retirement age. We identify a causal relation between ITIs and corporate hedging by using an instrumental variable approach and an exogenous shock sourced by the changes in the enforceability of non-competition agreements across states.