Contaminación de los alimentos

The related literature introduces different classifications for risk that investors face. Some categorise risk into three different types: business risk, strategic risk, and financial risk (Jorion, 1997). Others show that risk can be broken into two parts: financial risk and non- financial risk (Cabedo and Tirado, 2004). According to modern portfolio theory, the total risk of the firm can be decomposed into systematic risk (also called aggregate risk or market risk) and Idiosyncratic Risk (firm-specific or non- systematic risk).

Idiosyncratic risk is the risk that is unique to a particular security and can be associated with such risks as business, financial, and liquidity, etc. Shareholders can diversify away the idiosyncratic risk of a particular security by holding a sufficiently large basket of assets. Idiosyncratic risk of an individual security that caused by factors unique to that security can be greatly reduced or even totally eliminated by investors who hold a diversified collection (portfolio) of securities. Hedging with derivatives can be used to reduce and diversify idiosyncratic risk (Tufano, 1996; Berk and DeMarzo, 2001; Jin and Jorion, 2006; Gao, 2010). An example of non-systematic risk is the poor earnings of firms, reputation, or a strike amongst a firm’s employees, and the availability of raw materials (Moyer et al., 1998, P 191). While systematic risk (market risk) affects the aggregate market and cannot be eliminated by diversification.

The systematic risk of a security refers to that portion of the return variability caused by factors affecting the security market as whole. Thus, systematic risk is related to broad swings in the stock market and can be described as unavoidable risk (Ross et al., 2000; Berk and DeMarzo, 2001). Some common sources of systematic risk are political, economic and social risks, over which an organisation has little control, such as war, change in purchasing power (inflation), interest rate changes, and currency exchange rate risk. As systematic risk

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cannot be eliminated through diversification or hedging, it commands returns in excess of the risk free rate investment (while idiosyncratic risk does not command such returns because it can be eliminated by diversification).

Acharya and Bisin (2009) show how the incentive of managers can influence their hedging behaviour. Managers may pass up profitable projects with idiosyncratic risk in favour of standard projects that have greater aggregate risk. This risk-substitution moral hazard arises when managers can affect the risk composition of their firms’ cash flow and enables managers to be better diversified. However, such risk substitution occurs at the cost of reducing the firm’s market value and may lead to excessive systematic risk.

Literature shows that it is important to distinguish between systematic and idiosyncratic risk when studying the effect of the risk-taking incentives provided by stock option compensation (e.g., Tufano, 1996; Jin and Jorion; 2006). Stock option compensation may induce risk-averse managers to increase total firm’s risk by increasing systematic instead of idiosyncratic risk. This is mainly because an increase in systematic risk can result in a greater stock option value compared with an equivalent increase in idiosyncratic risk. This differential risk-taking incentive stems from CEOs’ ability to use hedging in order to reduce any unwanted increase in their firm’s risk. Therefore stock option compensation might not necessarily induce managers to undertake positive NPV projects that are primarily characterized by idiosyncratic risk when projects with systematic risk are available as an alternative (Armstrong and Vashishtha, 2012).

The risk diversification potential of credit derivatives has been widely discussed and acknowledged (Hirtle, 2009). CDS, which represents the largest sector of the credit derivatives market, are considered an important tool that enables firms to manage their portfolio of credit risks more efficiently (Minton et al., 2009). Indeed, CDS create new

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hedging opportunities and the development of the CDS market provide managers with a new, less expensive way to hedge or lay off a firm’s credit risk (Ashcraft and Santos, 2009).

Managers are responsible for taking many decisions on behalf of the shareholders, such as financial risk management decisions, investment decisions, and financing decisions (Rogers, 2002; Adkins et al., 2007). Financial risk management activity undertaken by a firm’s executive can be driven by the objective of protecting managerial interest. Therefore, the effect of managerial incentive can be positively related to the decision to use CDS for hedging purposes.

Managers are viewed as less-diversified compared to the shareholders, and have limited ability to diversify their wealth, which is tied to the firm value (Jensen andMeckling, 1976). These conditions encourage managers to avoid risk-taking by implementing conservative strategies such as using derivatives more to hedge the firm’s risk. Therefore, undiversified managers have a higher incentive for firm risk reduction since their compensation and firm- specific wealth invested in the firm, both through stock ownership and human capital which related to the ongoing existence of the firm. Further, managers believe that if they take more risk, all the benefits will go to the shareholders and they will bear all the cost of that excessive risky investment such as losing their jobs (Jensen and Meckling, 1976; Tufano, 1996).

Shareholders can diversify away the non-systematic risk of a particular firm by holding a sufficiently large basket of assets. Consequently, based on the modern portfolio theory shareholders can be considered as risk-neutral investors. However, managers are still considered to be risk-averse to not only market risk but also firm-specific risk and this will increase their incentive to avoid risk using more financial risk management since there is a significant amount of their wealth and income tied to firm performance (Jensen and

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Meckling, 1976; Stulz, 1996). This is the assumption underlying the risk-related incentive problem described through the traditional principal agent theory.

A firm’s risk represents a “non-systematic or diversifiable” risk that shareholders can eliminate by holding diversified portfolios (Stulz, 1996). Diversification represents an inexpensive risk management tool for shareholders and makes them indifferent to the firm’s specific risk. Therefore, shareholders prefer less CDS for hedging and are more willing to invest in risky investment projects, which maximize their value (Stulz, 1984; Rajgopal and Shevlin, 2002). The theory implies that poorly-diversified managers will direct their firms to engage in hedging to protect their interests and they are expected to use more CDS to reduce the firm’s risk to a level that conflict with shareholders’ interests.

This thesis examines the influence of the risk-taking incentive induced by stock options on the decision to use CDS for hedging purposes by European banks. This thesis is different to prior empirical studies because it is the first to address the influence of managers’ risk-taking incentives on CDS use. Further, this thesis takes advantage of the more detailed disclosure requirements that classify derivatives as hedging derivatives or speculating derivatives, where many prior studies have assumed that firms are generally using derivatives for hedging. However, prior empirical literature has provided conclusions that vary by sector, period, country, and econometric techniques used in the analysis, thereby making it difficult to generalize about the real motivations of companies using these financial instruments (Tufano, 1996; Gay and Nam, 1998; Rajgopal and Shevlin, 2002; Chen et al., 2006; Coles et al., 2006).

CDS use for trading purposes

The use of derivatives by firms as assumed in the literature is for managing firm risk, and the empirical evidence in the literature to suggest that derivatives are an instrument used to avoid

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risk by assuming that firms use derivative for hedging (e.g., Tufano, 1996; Géczy et al., 1997; Gay and Nam. 1998). Alternatively, another interesting application relates the potential for firms to use derivatives to take on risk by using derivatives for trading (speculating).

CDS can increase or decrease firm’s risk and the value of the firm, depending on the motive of CDS usage (Fung et al., 2012). Managers can simply use CDS as an extension of taking more credit risk and as tools to increase the firm’s credit exposures and increase return volatility (Stulz, 1996; Hentschel and Kothari, 2001; Nijskens and Wagner, 2011; Rossi, 2011). The existing empirical research on credit derivatives use shows that the CDS position of many banks is for dealer (trading) activities and not for credit risk management and that credit derivatives use for hedging is limited (Minton et al., 2009). This show that firms can use CDS for income generation and this likely increases the firms’ exposure to credit risk (Fung et al., 2012). Further, banks can increase their risk-taking when managers use CDS to source new credit risk, such as by selling protection in the CDS market. This shows that banks can use CDS to hedge any risk they may have by buying protection using CDS, while at the same time buying credit risk by selling protection in the CDS market (Nijskens and Wagner, 2011). The literature suggests that firms that use more derivatives to speculate are likely to believe that they have a comparative information advantage relative to the market, and hence view speculation as a positive net present value (NPV) and profitable activity (Géczy et al., 2007).

Speculation can be viewed as a profit-making activity in rational markets if the firm has an information advantage related to the prices of the instruments underlying the derivatives, or it must have economies of scale in transaction costs allowing for profitable arbitrage opportunities. Shareholders are likely to support the use of derivatives for speculation if speculation is a profit-making activity (Géczy et al., 1997; Adam and Fernando, 2006).

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From the above it can be clearly noted that the existing literature shows that the reasons behind using derivatives for speculating are obviously different from the reasons behind using derivatives for hedging (Adkins et al., 2007). The actual corporate use of derivatives does not seem to correspond closely to the theory. In practice many companies appear to be using financial risk management to pursue goals other than reducing volatility (Stulz, 1996). Recently, firms have been required to report derivatives used for trading purposes separately from derivatives used for hedging purposes.18