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Reward for Luck in a Dynamic Agency Model

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  • Florian Hoffmann
  • Sebastian Pfeil

Abstract

This article studies a continuous time principal-agent problem of a firm whose cash flows are determined by the manager's unobserved effort. The firm's cash flows are further subject to persistent and publicly observable shocks that are beyond the manager's control. While standard contracting models predict that compensation should optimally filter out these shocks, empirical evidence suggests otherwise. In line with this evidence, our model predicts that the manager is "rewarded for luck." The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhq062
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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 23 (2010)
Issue (Month): 9 ()
Pages: 3329-3345

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Handle: RePEc:oup:rfinst:v:23:y:2010:i:9:p:3329-3345

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Cited by:
  1. Keiichi Hori & Hiroshi Osano, 2013. "Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model," Review of Financial Studies, Society for Financial Studies, vol. 26(10), pages 2620-2647.
  2. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
  3. Hengjie Ai & Rui Li, 2012. "Moral hazard, investment, and firm dynamics," CQER Working Paper 2012-01, Federal Reserve Bank of Atlanta.
  4. Jonathan Wiley & Brandon Cline & Xudong Fu & Tian Tang, 2012. "Valuation Effects for Asset Sales," Journal of Financial Services Research, Springer, vol. 41(3), pages 103-120, June.
  5. Chaigneau, Pierre & Sahuguet, Nicolas, 2012. "The structure of CEO pay: pay-for-luck and stock-options," CEPR Discussion Papers 9182, C.E.P.R. Discussion Papers.

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