Stock Market Tournaments
AbstractWe propose a new theory of suboptimal risk-taking based on contractual externalities. We examine an industry with a continuum of _rms. Each _rm's manager exerts costly hidden e_ort. The productivity of e_ort is subject to systematic shocks. Firms' stock prices reect their performance relative to the industry average. In this setting, stock-based incentives cause complementarities in managerial e_ort choices. Externalities arise because shareholders do not internalize the impact of their incentive provision on the average e_ort. During booms, they over-incentivise managers, triggering a rat-race in e_ort exertion, resulting in excessive risk relative to the second-best. The opposite occurs during busts.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp706.
Date of creation: Jul 2012
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Web page: http://www.lse.ac.uk/fmg/
Other versions of this item:
- Emre Ozdenoren & Kathy Yuan, 2012. "Stock Market Tournaments," KoÃ§ University-TUSIAD Economic Research Forum Working Papers 1222, Koc University-TUSIAD Economic Research Forum.
- Ozdenoren, Emre & Yuan, Kathy, 2012. "Stock Market Tournaments," CEPR Discussion Papers 9000, C.E.P.R. Discussion Papers.
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- G01 - Financial Economics - - General - - - Financial Crises
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-CTA-2012-07-14 (Contract Theory & Applications)
- NEP-HRM-2012-07-14 (Human Capital & Human Resource Management)
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