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Agency-based asset pricing

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Author Info

  • Gorton, Gary B.
  • He, Ping
  • Huang, Lixin
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    Abstract

    We study an infinite-horizon Lucas tree model where a manager is hired to tend to the trees and is compensated with a fraction of the treesʼ output. The manager trades shares with investors and makes an effort that determines the distribution of the output. When the manager is less (more) risk-averse than the investors, managerial trading results in a less (more) volatile stock price and a lower (higher) risk premium. Trading between the manager and investors acts as an indirect renegotiation mechanism that dynamically modulates the managerʼs incentives and allocates risk and return, but its effectiveness is limited with dispersed small investors.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022053113000197
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 149 (2014)
    Issue (Month): C ()
    Pages: 311-349

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    Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:311-349

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Moral hazard; Managerial trading; Risk-sharing; Asset pricing;

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    References

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    Cited by:
    1. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.

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