Impact of heterogeneous managerial productivity on executive hedge markets in an asymmetric information environment

Stefan Avdjiev and Zheng Zeng

Finance Research Letters, 2009, vol. 6, issue 4, 187-201

Abstract: Using the standard principal-agent framework, we show that the existence of executives with different levels of productivity introduces a so-far-unexplored channel through which managerial effort incentives are sustained in a setting in which executives are allowed to trade away their stock-based compensation. Due to the presence of asymmetric information, high-productivity executives end up diversifying away a smaller fraction of their performance-based compensation than they would under perfect information or if they were the only type of executive in the market. As a result, they exert a higher effort level in equilibrium and thereby increase the value of the firm relative to the uniform productivity case, thus bringing the results closer to the outcome observed in a model with no hedging.

Keywords: Executive; hedging; Asymmetric; information; Executive; compensation; Incentive; contracting; Heterogeneous; managerial; productivity (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:6:y:2009:i:4:p:187-201

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