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Moral hazard with excess returns

Author

Listed:
  • Matthias Blonski

    (Goethe University Frankfurt am Main)

  • Ulf Lilienfeld-Toal

    (University of Luxembourg)

Abstract

We consider a public firm characterized by a moral hazard problem. A distinguished player is a CEO or activist shareholder who (i) is unrestricted to trade shares and (ii) has discretion to increase the value of this firm by exerting costly effort. von Lilienfeld-Toal and Rünzi (J Finance 69(3):1013–1050, 2014) investigate and confirm the empirical relevance of both these properties. This article shows that a distinguished player cannot be “priced in” correctly. In particular, such a firm is traded at a discount below its equilibrium value in a market equilibrium. Buyers can systematically earn excess returns on their investment. This prediction is indeed consistent with substantial positive abnormal returns for distinguished player firms within the S &P500 and S &P1500 sample reported in von Lilienfeld-Toal and Rünzi (J Finance 69(3):1013–1050, 2014).

Suggested Citation

  • Matthias Blonski & Ulf Lilienfeld-Toal, 2023. "Moral hazard with excess returns," Mathematics and Financial Economics, Springer, volume 17, number 6, March.
  • Handle: RePEc:spr:mathfi:v:17:y:2023:i:3:d:10.1007_s11579-023-00344-w
    DOI: 10.1007/s11579-023-00344-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Moral hazard; Discretion; Excess returns; Corporate finance; Asset pricing with large shareholders;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory

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