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Optimal managerial hedging and contracting with self-esteem concerns

Chongwoo Choe (), Donald Lien and Yu, Chia-Feng (Jeffrey)

International Review of Economics & Finance, 2015, vol. 37, issue C, 354-367

Abstract: Motivated by psychological evidence that self-esteem plays an important role in individual decision-making, this paper studies how self-esteem concerns influence a manager's effort choice and hedging behavior and how a board designs the managerial compensation in response. We show that when the manager has stronger self-esteem concerns, it requires higher managerial ownership to induce effort. In equilibrium, the manager's net hedging position increases with the strength of the manager's self-esteem concerns. Each of managerial hedging and self-esteem concerns added to an otherwise standard agency model increases the equilibrium pay-performance sensitivity. The agency cost increases as the manager's self-esteem concerns become stronger, but the manager's access to hedging opportunities itself does not change the agency cost. We also discuss how our basic model can be extended to account for circumstances under which managerial hedging can affect firm value.

Keywords: Managerial hedging; Executive compensation; Self-esteem; Agency cost (search for similar items in EconPapers)
JEL-codes: D86 G02 G32 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.iref.2014.12.007

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