Who times the foreign exchange market? Corporate speculation and CEO characteristics

This paper shows that managers’ personal beliefs and individual characteristics explain
a large share of the substantial time-variation of derivatives use beyond firm, industry,
and market fundamentals. We construct a panel data set of foreign currency derivatives
holdings and currency exposures for U.S. non-financial firms. We use a novel approach to
build a firm-specific foreign exchange return. We find that managers adjust derivatives
notional amounts in response to past foreign exchange returns, as if they were forming
views on future currency prices. We then construct an empirical measure of speculative
behavior for each firm to investigate the profile of the speculator. Firms where the CEO
holds an MBA degree, is younger, and has less previous working experience speculate
more. These results are consistent with overconfident managers taking more risk.