1. Introduction and Overview. 2. Detecting Influential Observations and Outliers. 3. Detecting and Assessing Collinearity. 4. Applications and Remedies. 5. Research Issues and Directions for Extensions. Bibliography. Author Index. Subject Index.

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

https://sites.temple.edu/lnaveen/files/2014/05/JFE_risktaking_2006.pdf

Managerial incentives and risk-taking ☆

Previous research offers little large-sample evidence on the magnitude of non-financial firms' risk exposure hedged by financial derivatives. Among 234 large non-financial derivatives users, if the median firm simultaneously experiences a three standard deviation change in interest rates, currency exchange rates, and commodity prices, its entire derivatives portfolio will generate, at most, $15 million in current cash flow and will rise in value by $31 million. These amounts are modest relative to firm size, operating cash flows, investing cash flows and other firm benchmarks. The findings indicate corporate derivatives use is a small piece of non-financial firms' overall risk profile, and suggest the need to rethink some empirical research documenting the economic importance of firms' derivative use.

/pdf/how-much-do-firms-hedge-with-derivatives-2s58i53a4j.pdf

How Much Do Firms Hedge with Derivatives

Executive Compensation: A Multidisciplinary Review of Recent Developments

https://www.mit.edu/~kothari/attach/GK%20Derivatives%20paper%20March%202001.pdf

How Much Do Firms Hedge With Derivatives

We use estimates of the Black-Scholes sensitivity of managers' stock option portfolios to stock return volatility and the sensitivity of managers' stock and stock option portfolios to stock price to test the relationship between managers' risk preferences and hedging activities. We find that as the sensitivity of managers' stock and stock option portfolios to stock price increases, firms tend to hedge more. However, as the sensitivity of managers' stock option portfolios to stock return volatility increases, firms tend to hedge less. ONE OF THE AGENCY COSTS associated with the corporate form of ownership comes from the risk aversion of the firm's managers. The typical corporate manager has a significant portion of his or her wealth invested in the corporation, both through portfolio holdings and the value of firm-specific human capital. As a result, managers have an incentive to reduce firm risk more than may be desirable from the perspective of an unaffiliated, diversified shareholder. One way to mitigate managerial risk aversion is to provide the manager with contracts that have a payoff structure that is a convex function of the firm's stock price (Smith and Stulz (1985)). Guay (1999) finds that stock options are an important way in which convexity is added to managers' portfolios. However, as recognized by Carpenter (2000) and Lambert, Larcker, and Verrecchia (1991), stock options create two opposing effects on managerial incentives. The first effect is sensitivity to stock return volatility. Due to the convex payoff structure of options, the value of a manager's stock option portfolio increases with the volatility of the firm's stock returns. This sensitivity to stock return volatility should, ceteris paribus, give the manager an incentive to take more risk. The second effect is sensitivity to stock price. This effect comes from the direct link between the payoff of an option and

The Volatility and Price Sensitivities of Managerial Stock Option Portfolios and Corporate Hedging

In this study we use estimates of the sensitivities of managers’ portfolios to stock return volatility and stock price to directly test the relationship between managerial incentives to bear risk and two important corporate decisions. We find that as the sensitivity of managers’ stock option portfolios to stock return volatility increases firms tend to choose higher debt ratios and make higher levels of R&D investment. These results are even stronger in a subsample of firms with relatively low outside monitoring. For these firms, managerial incentives to bear risk play a particularly pivotal role in determining leverage and R&D investment.

The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment

A recent study by two prominent finance researchers, Fama and French, introduces a new framework for studying risk vs. return: the migration of stocks across size-value portfolio space. Given the financial events of 2008, this first attempt to disentangle the relationships between migration behavior and stock returns is especially timely. Their work, however, derives results only for market segments, not individual companies, and only for one-year moves. Thus, we see a new challenge for financial data mining: how to capture and categorize the migration of individual companies, and how such behavior affects their returns.We propose a novel data mining approach to study the multi-year movement of individual companies. Specifically, we address the question: "How does one discover frequent migration patterns in the stock market?" We present a new trajectory mining algorithm to discover migration motifs in financial markets. Novel features of this algorithm are its handling of approximate pattern matching through a graph theoretical method, maximal clique identification, and incorporation of temporal and spatial constraints. We have performed a detailed study of the NASDAQ, NYSE, and AMEX stock markets, over a 43-year span. We successfully find migration motifs that confirm existing finance theories and other motifs that may lead to new financial models.

/pdf/migration-motif-a-spatial-temporal-pattern-mining-approach-4vjqz68bpl.pdf

Migration motif: a spatial - temporal pattern mining approach for financial markets

We apply methodology robust to outliers to an existing event study of the eect of U.S. nancial reform on the stock markets of the 10 largest world economies, and obtain results that dier from the original OLS results in important ways. This nding underlines the importance of han- dling outliers in event studies. We further review closely the population of outliers identied using Cook's distance and nd that many of the out- liers lie within the event windows. We acknowledge that those data points lead to inaccurate regression tting; however, we cannot remove them since they carry valuable information regarding the event eect. We study further the residuals of the outliers within event windows and nd that the resid- uals change with application of M-estimators and MM-estimators; in most cases they became larger, meaning the main prediction equation is pulled back towards the main data population and further from the outliers and indicating more proper tting. We support our empirical results by pseudo- simulation experiments and nd signicant improvement in determination of both types of the event eect abnormal returns and change in systematic risk. We conclude that robust methods are important for obtaining accurate measurement of event eects in event studies.

https://www.jds-online.com/files/JDS-1166.pdf

Robust Methods in Event Studies: Empirical Evidence and Theoretical Implications

We use estimates of the Black-Scholes sensitivity of managers' stock option portfolios to stock return volatility and the sensitivity of managers' stock and stock option portfolios to stock price to test the relationship between managers' risk preferences and hedging activities. We find that as the sensitivity of managers' stock and stock option portfolios to stock price increases, firms tend to hedge more. However, as the sensitivity of managers' stock option portfolios to stock return volatility increases, firms tend to hedge less.

John H. Thornton

Papers

The Volatility and Price Sensitivities of Managerial Stock Option Portfolios and Corporate Hedging

The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment

Migration motif: a spatial - temporal pattern mining approach for financial markets

Robust Methods in Event Studies: Empirical Evidence and Theoretical Implications

The Volatility and Price Sensitivities of Managerial Stock Option Portfolios and Corporate Hedging