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Agency-Based Asset Pricing

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  • Gary Gorton
  • Ping He

Abstract

We analyze the interaction between managerial decisions and firm value/asset prices by embedding the standard agency model of the firm into an otherwise standard asset pricing model. When the manager-agent's compensation depends on the firm's stock price performance, stock prices are set to induce the creation of future cash flows, instead of representing the discounted value of exogenous cash flows, as in the standard model. In our case, stock prices are formed via trading in the market to induce the managers to hold the number of shares consistent with the optimal effort level desired by the outside investors. We compare two price formation mechanisms, corresponding to two firm ownership structures. In the first, stock prices are formed competitively among a continuum of dispersed investors. In the second, stock prices are set by a single block shareholder, as a bargaining solution. Under both mechanisms there are persistent, dynamic, patterns of asst prices, The level of the equity premium and the return volatility depend on the risk aversion of the agents in the economy and the ownership structure of firms.

Suggested Citation

  • Gary Gorton & Ping He, 2006. "Agency-Based Asset Pricing," NBER Working Papers 12084, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12084
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    Cited by:

    1. Jia Yue & Ben-Zhang Yang & Ming-Hui Wang & Nan-Jing Huang, 2019. "Asset Prices with Investor Protection and Past Information," Papers 1911.00281, arXiv.org, revised Apr 2020.
    2. Bo Sun, 2009. "Asset returns with earnings management," International Finance Discussion Papers 988, Board of Governors of the Federal Reserve System (U.S.).
    3. repec:hum:wpaper:sfb649dp2007-055 is not listed on IDEAS
    4. Milo Bianchi & Rose-Anne Dana & Elyès Jouini, 2022. "Shareholder heterogeneity, asymmetric information, and the equilibrium manager," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(4), pages 1101-1134, June.
    5. Suleyman Basak & Georgy Chabakauri & M Deniz Yavuz, 2019. "Investor Protection and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4905-4946.
    6. Milo Bianchi & Rose-Anne Dana & Elyes Jouini, 2022. "Shareholder heterogeneity, asymmetric information, and the equilibrium manager," Post-Print hal-03693971, HAL.
    7. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.
    8. von Lilienfeld-Toal, Ulf & Ruenzi, Stefan, 2006. "Why managers hold shares of their firm: An empirical analysis," CFR Working Papers 06-11, University of Cologne, Centre for Financial Research (CFR).
    9. Gary Gorton & Ping He, 2023. "Optimal monetary policy in a collateralized economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(1), pages 55-89, January.
    10. Asian Development Bank Institute, 2017. "Fossil Fuel Subsidies in Asia: Trends, Impacts, and Reforms - Integrative Report," Working Papers id:11807, eSocialSciences.
    11. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.
    12. Charles S. Tapiero, 2015. "A financial CCAPM and economic inequalities," Quantitative Finance, Taylor & Francis Journals, vol. 15(3), pages 521-534, March.
    13. Sun, Kunpeng & Wang, Dan & Xiao, Xing, 2022. "Another victory of retail investors: Social media's monitoring role on firms' earnings management," International Review of Financial Analysis, Elsevier, vol. 82(C).
    14. Hongrui Feng & Yuecheng Jia, 2019. "Positive externalities of CEO delta," European Financial Management, European Financial Management Association, vol. 25(3), pages 591-621, June.

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