How nonlinear benchmark in delegation contract can affect asset price and price informativeness

Jiliang Sheng, Yanyan Yang, Xiaoting Wang and Jun Yang ()
Additional contact information
Jiliang Sheng: Jiangxi University of Finance and Economics
Yanyan Yang: Jiangxi University of Finance and Economics
Xiaoting Wang: Acadia University
Jun Yang: Acadia University

Economic Theory, 2024, vol. 78, issue 4, No 4, 1117-1168

Abstract: Abstract Delegation contracts with conventional linear benchmarking cannot motivate institutions to acquire information, which deteriorates price informativeness and increases return volatility. This study investigates performance-based contracts in which the benchmark is a nonlinear (quadratic) function of the benchmark portfolio return. In a unified model incorporating both information acquisition and investment decisions, we show that delegation contracts with the nonlinear benchmark can overcome the weakness of conventional benchmarked contracts. Specifically, they can incentivize information acquisition, enhance price informativeness, lower return volatility, and, when penalty intensity is relatively low, increase institutions’ expected utility and reduce fixed delegation costs. The impact of the contract’s incentive component on the equilibrium price and price informativeness depends on the average incentive slope. Further analysis finds that delegated investment by informed institutional investors can improve price informativeness. This effect is more pronounced under nonlinear benchmarked contracts than under non-benchmarked or linear benchmarked contracts.

Keywords: Performance-based contract; Nonlinear benchmark; Information acquisition incentive; Price informativeness (search for similar items in EconPapers)
JEL-codes: D82 D86 G11 G23 M52 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00199-024-01573-w Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:joecth:v:78:y:2024:i:4:d:10.1007_s00199-024-01573-w

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-024-01573-w

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().