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Moral Hazard and Dynamics of Insider Ownership Stakes

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Author Info
Branko Urosevic
Abstract

In this paper, I analyze the ownership dynamics of N strategic risk-averse corporate insiders facing a moral hazard problem. A solution for the equilibrium share price and the dynamics of the aggregate insider stake is obtained in two cases: when agents can credibly commit to an optimal ownership policy and when they cannot commit (time-consistent case). In the latter case, the aggregate stake gradually adjusts towards the competitive allocation. The speed of adjustment increases with N when outside investors are risk-averse, and does not depend on it when investors are risk-neutral. Predictions of the model are consistent with recent empirical findings.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 787.

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Date of creation: Feb 2001
Date of revision: Oct 2004
Handle: RePEc:upf:upfgen:787

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Related research
Keywords: Corporate insiders; moral hazard; ownership dynamics;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection

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