Agency-Based Asset Pricing
49 Pages Posted: 21 Feb 2006 Last revised: 7 Nov 2011
There are 2 versions of this paper
Agency-Based Asset Pricing
Agency-Based Asset Pricing
Date Written: January 23, 2008
Abstract
We study an infinite-horizon Lucas tree model where a manager is hired to tend to the trees and is compensated with a fraction of the trees’ output. The manager trades shares with investors and makes an effort that determines the distribution of the output. When the manager is less risk-averse than the investors, managerial trading smoothes output and results in a less volatile stock price and a lower risk premium; when the manager is more risk-averse, output and the stock price become more volatile and the risk premium is higher. Trading between the manager and investors acts as an indirect renegotiation mechanism that dynamically modulates the manager’s incentives, and in the meantime, allocates risk and return, but its effectiveness is limited when the market consists of dispersed small investors.
Keywords: Agency Problem, Corporate Governance, Asset Pricing, Price Formation
JEL Classification: C68, C78, D58, G12, G32, G34
Suggested Citation: Suggested Citation
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