Implications of Executive Hedge Markets for Firm Value Maximization
Abstract"This paper analyzes the incentive implications of executive hedge markets. The manager can promise the return from his shares to third parties in exchange for a fixed payment-swap contracts-and/or he can trade a customized security correlated with his firm-specific risk. The customized security improves incentives by diversifying the manager's firm-specific risk. However, unless they are exclusive, swap contracts lead to a complete unraveling of incentives. When security customization is sufficiently high, the manager only trades the customized security-but not any nonexclusive swap contracts, and incentives improve. Access to highly customized hedge securities and/or exclusive swap contracts increases the manager's pay-performance sensitivity". Copyright 2007, The Author(s) Journal Compilation (c) 2007 Blackwell Publishing.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.
Volume (Year): 16 (2007)
Issue (Month): 2 (06)
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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/
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- Hung, Mao-Wei & Liu, Yu-Jane & Tsai, Chia-Fen, 2012. "Managerial personal diversification and portfolio equity incentives," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 38-64.
- Avdjiev, Stefan & Zeng, Zheng, 2009. "Impact of heterogeneous managerial productivity on executive hedge markets in an asymmetric information environment," Finance Research Letters, Elsevier, vol. 6(4), pages 187-201, December.
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