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Moral hazard and dynamics of insider ownership stakes

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  • Branko Urosevic
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    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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    File URL: http://www.econ.upf.edu/docs/papers/downloads/787.pdf
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    Bibliographic Info

    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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    Web page: http://www.econ.upf.edu/

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    Keywords: Corporate insiders; moral hazard; ownership dynamics;

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