Hedge markets for executives and corporate agency
AbstractThis 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.
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 InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006009.
Date of creation: 00 Feb 2006
Date of revision:
Contact details of provider:
Postal: Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium)
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
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; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bisin, Alberto & Guaitoli, Danilo, 1998.
"Moral Hazard and Non-Exclusive Contracts,"
CEPR Discussion Papers
1987, C.E.P.R. Discussion Papers.
- Charles M. Kahn & Dilip Mookherjee, 1996.
"Competition and Incentives with Non-Exclusive Contracts,"
0075, Boston University - Industry Studies Programme.
- Charles M. Kahn & Dilip Mookherjee, 1998. "Competition and Incentives with Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 443-465, Autumn.
- Kahn, C.M. & Mookherjee, D., 1996. "Competition and Incentives with Non-Exclusive Contracts," Papers 75, Boston University - Industry Studies Programme.
- Edward P. Lazear, 2000.
"Performance Pay and Productivity,"
American Economic Review,
American Economic Association, vol. 90(5), pages 1346-1361, December.
- Bizer, David S. & DeMarzo, Peter M., 1999. "Optimal Incentive Contracts When Agents Can Save, Borrow, and Default," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 241-269, October.
- Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
- Bisin, Alberto & Rampini, Adriano A., 2006.
"Markets as beneficial constraints on the government,"
Journal of Public Economics,
Elsevier, vol. 90(4-5), pages 601-629, May.
- Adriano Rampini & Alberto Bisin, 2005. "Markets as Beneficial Constraints on the Government," 2005 Meeting Papers 325, Society for Economic Dynamics.
- Jin, Li, 2002. "CEO compensation, diversification, and incentives," Journal of Financial Economics, Elsevier, vol. 66(1), pages 29-63, October.
- Bebchuk, Lucian Arye & Fried, Jesse, 2003.
"Executive Compensation as an Agency Problem,"
CEPR Discussion Papers
3961, C.E.P.R. Discussion Papers.
- Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
- Jensen, Michael C & Murphy, Kevin J, 1990.
"Performance Pay and Top-Management Incentives,"
Journal of Political Economy,
University of Chicago Press, vol. 98(2), pages 225-64, April.
- Eli Ofek & David Yermack, 2000. "Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, vol. 55(3), pages 1367-1384, 06.
- Cadenillas, Abel & Cvitanic, Jaksa & Zapatero, Fernando, 2004. "Leverage decision and manager compensation with choice of effort and volatility," Journal of Financial Economics, Elsevier, vol. 73(1), pages 71-92, July.
- Franke, Gunter & Stapleton, Richard C. & Subrahmanyam, Marti G., 1998. "Who Buys and Who Sells Options: The Role of Options in an Economy with Background Risk," Journal of Economic Theory, Elsevier, vol. 82(1), pages 89-109, September.
- Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
- Admati, Anat R & Pfleiderer, Paul & Zechner, Josef, 1994.
"Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium,"
Journal of Political Economy,
University of Chicago Press, vol. 102(6), pages 1097-1130, December.
- A. Admati & P. Pßeiderer & J. Zechner, 2005. "Large shareholder activism, risk sharing, and financial market equilibrium," Public Economics 0502011, EconWPA.
- Kahn, Charles M. & Mookherjee, Dilip, 1995. "Market failure with moral hazard and side trading," Journal of Public Economics, Elsevier, vol. 58(2), pages 159-184, October.
- Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
- May, Don O, 1995. " Do Managerial Motives Influence Firm Risk Reduction Strategies?," Journal of Finance, American Finance Association, vol. 50(4), pages 1291-1308, September.
- Alon Brav & Paul A. Gompers, 2003. "The Role of Lockups in Initial Public Offerings," Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 1-29.
- Rajesh K. Aggarwal & Andrew A. Samwick, 2003. "Why Do Managers Diversify Their Firms? Agency Reconsidered," Journal of Finance, American Finance Association, vol. 58(1), pages 71-118, 02.
- Richard A. Lambert, 1986. "Executive Effort and Selection of Risky Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 77-88, Spring.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS).
If references are entirely missing, you can add them using this form.