Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5069960 | Finance Research Letters | 2009 | 15 Pages |
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.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Stefan Avdjiev, Zheng Zeng,