Hiding under the table : the economic impact of mandatory disclosure on executive hedging

Abstract

This study examines the economic consequences of the Securities and Exchange Commission’s (SEC) mandatory disclosure on executive hedging. Executive hedging involves the use of financial derivatives by corporate managers to mitigate personal wealth risk associated with potential declines in their firm’s stock price. Employing a novel dataset of executive hedging policies and practices extracted from proxy statements, the study reveals that the SEC’s mandatory disclosure rule significantly curtails corporate risk-taking, enhances investment efficiency, and positively influences firm valuation. Notably, the regulation mitigates tendencies towards empire-building and rectifies the misallocation of R&D resources. The research enriches the understanding of the SEC’s mandatory disclosure on executive hedging.