**Hypothesis 2 (H2).** *The positive relation between pension incentive and the hedging activity should be more pronounced for the firms with strong governance than those with poor governance.*

To summarize, both hypotheses predict a positive relation between pension incentive and hedging. The theory of optimal contracting further suggests that a positive relation should be more significant for firms with strong corporate governance than for firms with weak governance. In contrast, however, an opposite view would predict that the positive relation between hedging and pension incentive should only hold for poorly governed firms where managers face fewer consequences from pursuing corporate policies that are mainly motivated for self-interests. In the empirical tests below, we first examine how pension incentive influences hedging, and further condition the relation on corporate governance to verify the h of optimal contracting.
