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Hedge markets for executives and corporate agency

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  • OZERTURK, Saltuk

Abstract

This paper analyzes the implications of executive hedge markets for firm value maximization in an optimal contracting framework. The main results are as follows: Without any hedging ability, the manager underinvests in risk at the firm level to diversify his own compensation risk. If the manager can trade a security correlated with firm specific risk, the underinvestment in risk is reduced, optimal managerial share ownership and equilibrium effort increase. If the manager can hedge by simulating the sale of his shares, however, he can completely undo any incentive scheme. The model predicts that a higher degree of financial market development implies higher managerial share ownership and more efficient risk taking at the firm level.

Suggested Citation

  • OZERTURK, Saltuk, 2006. "Hedge markets for executives and corporate agency," LIDAM Discussion Papers CORE 2006009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2006009
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    References listed on IDEAS

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    Cited by:

    1. Avdjiev, Stefan & Zeng, Zheng, 2009. "Impact of heterogeneous managerial productivity on executive hedge markets in an asymmetric information environment," Finance Research Letters, Elsevier, vol. 6(4), pages 187-201, December.

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    More about this item

    Keywords

    managerial hedge markets; inefficient risk reduction; effort provision; optimal managerial share ownership; security innovation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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