The effect of managerial bonus plans on corporate derivatives usage

This paper examines the effect of risk management incentives resulting from managerial bonus plans on firms' derivatives usage. Partitioning the sample into firms whose managers are more likely to face convexity or concavity in the bonus payoff function, we find a negative relation between bonus plans and derivatives usage for firms in the convex region and a positive relation for firms in the concave region. These results provide evidence that the incentives inherent in managerial bonus plans cause managers to increase or decrease firm risk in order to maximize their expected bonus payments.