Optimal Contract, Ownership Structure and Asset Pricing
This paper studies a dynamic equilibrium asset pricing model with managerial moral hazard. A representative, all-equity firm is owned by two separate types of constant absolute risk-aversion (CARA) investors---a large shareholder and a continuum of small shareholders. The large shareholder holds a long-term view and trades infrequently. From her controlling equity stake in the firm, the large shareholder plays a dominant role in hiring a manager and implementing the managerial compensation scheme. Small dispersed and competitive shareholders, however, trade shares of the firm continuously. We obtain a closed-form solution that characterizes the firm's ownership structure, managerial contract and equity return. As a benchmark case, we consider the first-best case with observable managerial effort in which the equilibrium solution arises solely from optimal risk sharing incentives. Through both the analytical and numerical characterizations of the model, we find that (i) The presence of moral hazard leads to a larger equity stake in the firm held by the large shareholder; (ii) Both the expected stock return and stock return volatility are lower under moral hazard because of risk sharing effects of managerial incentives; (iii) The risk aversion parameters of the manager and investors have different effects on the equilibrium outcome; (iv) The interactions among pay-performance sensitivity, large shareholder ownership, and expected stock return/stock return volatility can be positive or negative.
Year of publication: |
2014
|
---|---|
Authors: | Zeng, Qi ; Hae Won (Henny) Jung |
Institutions: | Society for Economic Dynamics - SED |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Leverage Dynamics under Segmented Equity and Debt Markets
Jung, Hae Won (Henny), (2020)
-
Ownership Structure, Incentives, and Asset Prices
Jung, Hae Won (Henny), (2019)
-
Ownership Structure, Incentives, and Asset Returns
Jung, Hae Won (Henny), (2022)
- More ...