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Agency-based asset pricing

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  • Gorton, Gary B.
  • He, Ping
  • Huang, Lixin

Abstract

We study an infinite-horizon Lucas tree model where a manager is hired to tend to the trees and is compensated with a fraction of the treesʼ output. The manager trades shares with investors and makes an effort that determines the distribution of the output. When the manager is less (more) risk-averse than the investors, managerial trading results in a less (more) volatile stock price and a lower (higher) risk premium. Trading between the manager and investors acts as an indirect renegotiation mechanism that dynamically modulates the managerʼs incentives and allocates risk and return, but its effectiveness is limited with dispersed small investors.

Suggested Citation

  • Gorton, Gary B. & He, Ping & Huang, Lixin, 2014. "Agency-based asset pricing," Journal of Economic Theory, Elsevier, vol. 149(C), pages 311-349.
  • Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:311-349
    DOI: 10.1016/j.jet.2012.09.017
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    Cited by:

    1. Jia Yue & Ben-Zhang Yang & Ming-Hui Wang & Nan-Jing Huang, 2019. "Asset Prices with Investor Protection and Past Information," Papers 1911.00281, arXiv.org, revised Apr 2020.
    2. Bo Sun, 2009. "Asset returns with earnings management," International Finance Discussion Papers 988, Board of Governors of the Federal Reserve System (U.S.).
    3. von Lilienfeld-Toal, Ulf & Ruenzi, Stefan, 2006. "Why managers hold shares of their firm: An empirical analysis," CFR Working Papers 06-11, University of Cologne, Centre for Financial Research (CFR).
    4. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.
    5. Gary Gorton & Ping He, 2016. "Optimal Monetary Policy in a Collateralized Economy," NBER Working Papers 22599, National Bureau of Economic Research, Inc.
    6. Asian Development Bank Institute, 2017. "Fossil Fuel Subsidies in Asia: Trends, Impacts, and Reforms - Integrative Report," Working Papers id:11807, eSocialSciences.
    7. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.
    8. Charles S. Tapiero, 2015. "A financial CCAPM and economic inequalities," Quantitative Finance, Taylor & Francis Journals, vol. 15(3), pages 521-534, March.
    9. Hongrui Feng & Yuecheng Jia, 2019. "Positive externalities of CEO delta," European Financial Management, European Financial Management Association, vol. 25(3), pages 591-621, June.

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    More about this item

    Keywords

    Moral hazard; Managerial trading; Risk-sharing; Asset pricing;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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