Abstract

http://ssrn.com/abstract=665323
 
 

References (54)



 
 

Citations (7)



 


 



Managerial Hedging and Portfolio Monitoring


Adriano A. Rampini


Duke University

Alberto Bisin


New York University (NYU) - Department of Economics; New York University (NYU) - Center for Experimental Social Science (CESS); National Bureau of Economic Research (NBER)

Piero Gottardi


European University Institute - Department of Economics; Ca Foscari University of Venice - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

November 2004

AFA 2006 Boston Meetings Paper

Abstract:     
Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their firms. We study the agency problem between shareholders and a manager when the manager can hedge his incentive compensation using financial markets and shareholders can only imperfectly monitor the manager's portfolio in order to keep him from hedging the risk in his compensation. We find that the optimal contract implies incentive compensation and governance provisions with the following properties: (i) the manager's portfolio is monitored only when the firm performs poorly, (ii) the manager's compensation is more sensitive to firm performance when monitoring is more costly or when hedging markets are more developed, and (iii) conditional on the firm's performance, the manager's compensation is lower when his portfolio is monitored, even if no hedging is revealed by monitoring.

Number of Pages in PDF File: 49

Keywords: Executive Compensation, Incentives, Monitoring, Corporate Governance

JEL Classification: G30, D82

working papers series





Download This Paper

Date posted: February 27, 2005  

Suggested Citation

Rampini, Adriano A. and Bisin, Alberto and Gottardi, Piero, Managerial Hedging and Portfolio Monitoring (November 2004). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=665323 or http://dx.doi.org/10.2139/ssrn.665323

Contact Information

Adriano A. Rampini (Contact Author)
Duke University ( email )
100 Fuqua Drive
Durham, NC 27708
United States
+1 919 660-7797 (Phone)
+1 919 660-8038 (Fax)
HOME PAGE: http://faculty.fuqua.duke.edu/~rampini/
Alberto Bisin
New York University (NYU) - Department of Economics
14 West 4th Street
New York, NY 10012
United States
New York University (NYU) - Center for Experimental Social Science (CESS) ( email )
One Washington Place
New York, NY 10003
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Piero Gottardi
European University Institute - Department of Economics ( email )
Villa Schifanoia
133 via Bocaccio
Firenze (Florence), 50014
Italy
Ca Foscari University of Venice - Department of Economics ( email )
Cannaregio 873
Venice, 30121
Italy
+39 041 257 4192 (Phone)
+39 041 257 4176 (Fax)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Feedback to SSRN


Paper statistics
Abstract Views: 1,423
Downloads: 77
Download Rank: 116,198
References:  54
Citations:  7

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.344 seconds