Industry tournament incentives and corporate hedging policies

This paper examines how a tournament among CEOs to progress within the CEO labor market influences their corporate hedging policies. We employ a textual analysis of 10-Ks to generate corporate hedging proxies, finding that the likelihood and intensity of hedging grow as the CEO labor market tournament prizes increase. We also explore the mitigating impact of corporate hedging on the adverse effects of risk-inducing industry tournament incentives (ITIs) on the cost of debt and stock price crash risk, noting that these could be possible reasons behind the relation. Additionally, we observe that the relationship between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and for firms whose CEOs are the founders of the company or are of retirement age. We identify a causal relation between ITIs and corporate hedging using an instrumental variable approach and an exogenous shock sourced from changes in the enforceability of noncompetition agreements across states.