Risk management and optimal investment with inalienable human capital

Zeyu Yang, Jiayi Zhuo and Yuqian Zhang

Finance Research Letters, 2024, vol. 61, issue C

Abstract: We consider a moral hazard problem in a continuous-time model, where project risk is controllable. The unobservability of agent behavior creates information asymmetry, consequently influencing investor decisions. We utilize martingale methods to determine the optimal policy. The investor’s scaled value function is represented using an ordinary differential equation. We find that the manager’s search for new investors impacts the boundary conditions due to inalienable human capital. Using comparative static analysis, we find that the endogenous no-saving condition helps eliminate information asymmetry caused by unobserved effort. Moreover, as the agent’s continuation value increases, the company’s risk management target approaches the optimal risk management target under full information. A higher manager’s continuation value leads to inferior investment opportunities.

Keywords: Risk management; Security design; Optimal investment; Information asymmetry; Human capital (search for similar items in EconPapers)
JEL-codes: D81 D82 E22 E24 J41 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612323013429
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:61:y:2024:i:c:s1544612323013429

DOI: 10.1016/j.frl.2023.104970

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().