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Optimal Managerial Contracts with Self-Esteem Concerns When Managers Can Hedge

Author

Listed:
  • Chongwoo Choe
  • Donald Lien
  • Chia-Feng Yu

Abstract

We study an optimal contracting problem when the manager has self-esteem concerns and access to a hedging market. We show that the manager's equilibrium hedging position increases when he is more risk-averse, more uncertain about his own ability, or has stronger self-esteem concerns. Each element of managerial hedging and self-esteem concerns added to an otherwise standard agency model increases the equilibrium pay-performance sensitivity. The agency cost increases as the manager's self-esteem concerns become stronger, but the manager's access to hedging opportunities itself does not change the agency cost. We also provide conditions for the positive relationship between risk and incentives.

Suggested Citation

  • Chongwoo Choe & Donald Lien & Chia-Feng Yu, 2013. "Optimal Managerial Contracts with Self-Esteem Concerns When Managers Can Hedge," Monash Economics Working Papers 49-13, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2013-49
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2013/index.html
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    More about this item

    Keywords

    Managerial Hedging; Executive Compensation; Self-Esteem.;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • 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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