Agency-based asset pricing

Gary B. Gorton, Ping He and Lixin Huang ()

Journal of Economic Theory, 2014, vol. 149, issue C, 311-349

Abstract: We study an infinite-horizon Lucas tree model where a manager is hired to tend to the trees and is compensated with a fraction of the treesʼ output. The manager trades shares with investors and makes an effort that determines the distribution of the output. When the manager is less (more) risk-averse than the investors, managerial trading results in a less (more) volatile stock price and a lower (higher) risk premium. Trading between the manager and investors acts as an indirect renegotiation mechanism that dynamically modulates the managerʼs incentives and allocates risk and return, but its effectiveness is limited with dispersed small investors.

Keywords: Moral hazard; Managerial trading; Risk-sharing; Asset pricing (search for similar items in EconPapers)
JEL-codes: D81 G12 G32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Agency-Based Asset Pricing (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:149:y:2014:i:c:p:311-349

DOI: 10.1016/j.jet.2012.09.017

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