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Impact of heterogeneous managerial productivity on executive hedge markets in an asymmetric information environment

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  • Avdjiev, Stefan
  • Zeng, Zheng

Abstract

Using the standard principal-agent framework, we show that the existence of executives with different levels of productivity introduces a so-far-unexplored channel through which managerial effort incentives are sustained in a setting in which executives are allowed to trade away their stock-based compensation. Due to the presence of asymmetric information, high-productivity executives end up diversifying away a smaller fraction of their performance-based compensation than they would under perfect information or if they were the only type of executive in the market. As a result, they exert a higher effort level in equilibrium and thereby increase the value of the firm relative to the uniform productivity case, thus bringing the results closer to the outcome observed in a model with no hedging.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:finlet:v:6:y:2009:i:4:p:187-201
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    References listed on IDEAS

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    1. Kong, Xiangyi & Xu, Jian & Zhang, Yinge, 2022. "Industry competition and firm productivity: Evidence from the antitrust policy in China," Finance Research Letters, Elsevier, vol. 47(PB).

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