Managerial Career Concerns and Risk Management
Jouahn Nam, Jun Wang and Ge Zhang∗
Abstract
We present a dynamic model of corporate risk management and managerial career
concerns. We show that managers with high (low) career concerns are more likely to
speculate (hedge) early in their careers. In the later stage of their careers when managers
have less career concerns, there is no speculative motive for self interested managers. On
the other hand, managers with minimal career concerns engage in neither hedging nor
speculation early in their careers, but they may choose to hedge after poor early perfor-
mance.
∗Nam is from Lubin School of Business, Pace University, New York, NY, 10038. phone: (212) 346-1818,
email: jnam@pace.edu. Wang is from LSU and Baruch College, Department of Finance, Baton Rouge, LA
70803 phone: (225) 578-6335, fax: (225) 578-6366, email: junwang@lsu.edu. Zhang is from Department of
Economics and Finance, College of Business Administration, University of New Orleans, New Orleans, LA
70148. Tel: (504) 280-6096, email: gzhang@uno.edu. We would like to thank Gerald Gay, Tom Noe, Michael
Rebello, Rubin Saposnik for many helpful comments. All errors are ours.
1 Introduction
In a world with no friction such as the world in Modigliani and Miller (1958), one can use
an argument similar to the one concerning financing activities to show that risk management
does not change the value of the firm. Different financing activities only change the distrib-
ution of firm value among various claim holders but do not affect the total value of the firm.
Since shareholders of the firm can achieve their goal of reducing systematic risk by holding a
diversified portfolio, corporate risk management neither increases nor decreases shareholders’
welfare. If risk management bears a cost, it is a strictly value-reducing activity. Therefore, the
classical paradigm suggests that corporate managers should not engage in any risk manage-
ment activities at all.
The increasing use of derivatives by corporations contradicts th