Agency-Based Asset Pricing
49 Pages Posted: 11 May 2006 Last revised: 10 Jul 2022
There are 2 versions of this paper
Agency-Based Asset Pricing
Date Written: March 2006
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Gary B. Gorton, Ping He, ...
-
Why Managers Hold Shares of Their Firm: An Empirical Analysis
-
Asset Returns with Earnings Management
By Bo Sun
-
Asset Returns with Earnings Management
By Bo Sun
-
Asset Returns with Earnings Management
By Bo Sun
-
CEO Ownership and Stock Market Performance, and Managerial Discretion
-
Limited Market Participation and Asset Prices in the Presence of Earnings Management
By Bo Sun
-
Limited Market Participation and Asset Prices with Earnings Management
By Bo Sun