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Own-company stockholding and work effort preferences of an unconstrained executive

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  • Sascha Desmettre
  • John Gould
  • Alexander Szimayer

Abstract

We develop a framework for analyzing an executive’s own-company stockholding and work effort preferences. The executive, characterized by risk aversion and work effectiveness parameters, invests his personal wealth without constraint in the financial market, including the stock of his own company whose value he can directly influence with work effort. The executive’s utility-maximizing personal investment and work effort strategy is derived in closed form, and a utility indifference rationale is applied to determine his required compensation. Being unconstrained by performance contracting, the executive’s work effort strategy establishes a base case for theoretical or empirical assessment of the benefits or otherwise of constraining executives with performance contracting. Copyright Springer-Verlag 2010

Suggested Citation

  • Sascha Desmettre & John Gould & Alexander Szimayer, 2010. "Own-company stockholding and work effort preferences of an unconstrained executive," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 72(3), pages 347-378, December.
    • Handle: RePEc:spr:mathme:v:72:y:2010:i:3:p:347-378
    DOI: 10.1007/s00186-010-0322-5
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    1. Sascha Desmettre & Alexander Szimayer, 2011. "Work effort, consumption, and portfolio selection: when the occupational choice matters," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 74(1), pages 121-145, August.
    2. Sascha Desmettre, 2012. "Optimal investment for executive stockholders with exponential utility," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 35(2), pages 151-170, November.

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