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Liquidity and Risk Management: Coordinating Investment and Compensation Policies

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  • Patrick Bolton

    (Columbia University)

  • Neng Wang

    (Columbia Business School)

  • Jinqiang Yang

    (School of Finance, Shanghai University of Finance and Economics)

Abstract

We formulate a dynamic financial contracting problem with risky inalienable human capital. We show that the inalienability of the entrepreneur’s risky human capital not only gives rise to endogenous liquidity limits but also calls for dynamic liquidity and risk management policies via standard securities that firms routinely pursue in practice, such as retained earnings, possible line of credit draw-downs, and hedging via futures and insurance contracts.

Suggested Citation

  • Patrick Bolton & Neng Wang & Jinqiang Yang, 2016. "Liquidity and Risk Management: Coordinating Investment and Compensation Policies," 2016 Meeting Papers 1703, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1703
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    Cited by:

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    3. Lewis Alexander & Janice Eberly, 2018. "Investment Hollowing Out," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(1), pages 5-30, March.
    4. Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2018. "Agency Conflicts over the Short and Long Run: Short-termism, Long-termism, and Pay-for-Luck," CEPR Discussion Papers 12720, C.E.P.R. Discussion Papers.
    5. Brian Akins & David De Angelis & Maclean Gaulin, 2020. "Debt Contracting on Management," Journal of Finance, American Finance Association, vol. 75(4), pages 2095-2137, August.
    6. Junkee Jeon & Hyeng Keun Koo & Kyunghyun Park, 2018. "Optimal Insurance with Limited Commitment in a Finite Horizon," Papers 1812.11669, arXiv.org, revised Jan 2019.

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