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Managerial risk reduction, incentives and firm value

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  • Saltuk Ozerturk

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    Abstract

    Empirical evidence suggests that managers privately alter the risk in their compensation by trading in the financial markets. This paper analyzes the implications of the manager’s hedging ability on her optimal compensation scheme, incentives and firm value. I allow the manager to reduce her systematic risk exposure by trading the market portfolio. I find that the manager’s optimal hedge depends on the liquidity of the market. Due to imperfect liquidity, the manager’s optimal hedge is not complete. The equilibrium pay-performance sensitivity and hence the manager’s equilibrium incentives and the firm value increases in the liquidity of the market. Copyright Springer-Verlag Berlin/Heidelberg 2006

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    File URL: http://hdl.handle.net/10.1007/s00199-004-0569-2
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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 27 (2006)
    Issue (Month): 3 (04)
    Pages: 523-535

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    Handle: RePEc:spr:joecth:v:27:y:2006:i:3:p:523-535

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    Web page: http://link.springer.de/link/service/journals/00199/index.htm

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    Related research

    Keywords: Pay-performance sensitivity; Hedging; Managerial compensation; Liquidity; Systematic risk.;

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    Cited by:
    1. 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.
    2. 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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