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

  • Avdjiev, Stefan
  • Zeng, Zheng

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.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 6 (2009)
Issue (Month): 4 (December)
Pages: 187-201

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Handle: RePEc:eee:finlet:v:6:y:2009:i:4:p:187-201
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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