Managerial risk reduction, incentives and firm value
AbstractEmpirical 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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 27 (2006)
Issue (Month): 3 (04)
Contact details of provider:
Web page: http://link.springer.de/link/service/journals/00199/index.htm
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).
If references are entirely missing, you can add them using this form.