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Hedge markets for executives and corporate agency

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Author Info
OZERTURK, Saltuk
Abstract

This paper analyzes the implications of executive hedge markets for firm value maximization in an optimal contracting framework. The main results are as follows: Without any hedging ability, the manager underinvests in risk at the firm level to diversify his own compensation risk. If the manager can trade a security correlated with firm specific risk, the underinvestment in risk is reduced, optimal managerial share ownership and equilibrium effort increase. If the manager can hedge by simulating the sale of his shares, however, he can completely undo any incentive scheme. The model predicts that a higher degree of financial market development implies higher managerial share ownership and more efficient risk taking at the firm level.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006009.

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Date of creation: 01 Feb 2006
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Handle: RePEc:cor:louvco:2006009

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Related research
Keywords: managerial hedge markets; inefficient risk reduction; effort provision; optimal managerial share ownership; security innovation;

Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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    Other versions:
  2. Stulz, Ren? M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June. [Downloadable!]
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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