Taking a View: Corporate Speculation, Governance, and Compensation

Using responses to a well-known confidential survey, we study corporations' use of derivatives to "take a view" on interest rate and currency movements. Characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively; that is, they do not speculate to increase risk by "betting the ranch." Speculating firms encourage managers to speculate through incentivealigning compensation arrangements and bonding contracts, and they use derivativesspecific internal controls to manage potential abuse. Finally, we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey; they are not.