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Hedge markets for executives and corporate agency

  • OZERTURK, Saltuk
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    This paper analyzes the implications of executive hedge markets for firm value maximization in an optimal contracting framework. The main results are as follows: Without any hedging ability, the manager underinvests in risk at the firm level to diversify his own compensation risk. If the manager can trade a security correlated with firm specific risk, the underinvestment in risk is reduced, optimal managerial share ownership and equilibrium effort increase. If the manager can hedge by simulating the sale of his shares, however, he can completely undo any incentive scheme. The model predicts that a higher degree of financial market development implies higher managerial share ownership and more efficient risk taking at the firm level.

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    File URL: http://alfresco.uclouvain.be/alfresco/download/attach/workspace/SpacesStore/3c7f9992-d545-4b18-8da4-8c11a7acdc0b/coredp_2006_09.pdf
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    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006009.

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    Date of creation: 00 Feb 2006
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    Handle: RePEc:cor:louvco:2006009
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    16. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    17. Guo, Ming & Ou-Yang, Hui, 2006. "Incentives and performance in the presence of wealth effects and endogenous risk," Journal of Economic Theory, Elsevier, vol. 129(1), pages 150-191, July.
    18. Alon Brav & Paul A. Gompers, 2003. "The Role of Lockups in Initial Public Offerings," Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 1-29.
    19. Eli Ofek & David Yermack, 2000. "Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, vol. 55(3), pages 1367-1384, 06.
    20. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
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    22. Jin, Li, 2002. "CEO compensation, diversification, and incentives," Journal of Financial Economics, Elsevier, vol. 66(1), pages 29-63, October.
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