Own-Company Stockholding and Work Effort Preferences of an Unconstrained Executive

37 Pages Posted: 21 Jan 2009 Last revised: 26 Apr 2010

See all articles by Sascha Desmettre

Sascha Desmettre

Johannes Kepler University Linz

John Gould

Curtin University

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration

Date Written: January 21, 2009

Abstract

We develop a framework for analyzing an executive's own-company stockholding and work effort preferences. The executive, characterized by risk aversion and work effectiveness parameters, invests his personal wealth without constraint in the financial market, including the stock of his own company whose value he can directly influence with work effort. The executive's utility-maximizing personal investment and work effort strategy is derived in closed form, and a utility indifference rationale is applied to determine his required compensation. Being unconstrained by performance contracting, the executive's work effort strategy establishes a base case for theoretical or empirical assessment of the benefits or otherwise of constraining executives with performance contracting.

Keywords: optimal portfolio choice, executive compensation

JEL Classification: M52, G11

Suggested Citation

Desmettre, Sascha and Gould, John and Szimayer, Alexander, Own-Company Stockholding and Work Effort Preferences of an Unconstrained Executive (January 21, 2009). Available at SSRN: https://ssrn.com/abstract=1330814 or http://dx.doi.org/10.2139/ssrn.1330814

Sascha Desmettre (Contact Author)

Johannes Kepler University Linz ( email )

Altenbergerstr. 69
A-4040 Linz, Upper Austria 4040
Austria

HOME PAGE: http://shorturl.at/dwX47

John Gould

Curtin University ( email )

Bentley 6102 WA
Australia
+618 9266 9028 (Phone)

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
75
Abstract Views
903
rank
373,185
PlumX Metrics