Moral Hazard with Excess Returns

41 Pages Posted: 8 Jan 2020

See all articles by Matthias Blonski

Matthias Blonski

J.W. Goethe University

Ulf von Lilienfeld-Toal

Luxembourg School of Finance

Date Written: November 26, 2018


We consider a public firm characterized by a moral hazard problem. A distinguished player is a CEO or activist shareholder who (i) is unrestricted to trade shares and (ii) has discretion to increase the value of this firm by exerting costly effort. Von Lilienfeld-Toal and Ru ̈nzi (2014) investigate and confirm the empirical relevance of both these properties. This article shows that a distinguished player cannot be ”priced in” correctly. In particular, such a firm is traded at a discount below its equilibrium value in a market equilibrium. Buyers can systematically earn excess returns on their investment. This prediction is indeed consistent with substantial positive abnormal returns for distinguished player firms within the S&P500 and S&P1500 sample reported in von Lilienfeld-Toal and Runzi (2014).

Keywords: moral hazard, discretion, excess returns, corporate finance, asset pricing with large shareholders

JEL Classification: G12, G32, C72, D43, D46

Suggested Citation

Blonski, Matthias and Lilienfeld-Toal, Ulf von, Moral Hazard with Excess Returns (November 26, 2018). Available at SSRN: or

Matthias Blonski (Contact Author)

J.W. Goethe University ( email )

Economics Department
Frankfurt am Main, 60054

Ulf von Lilienfeld-Toal

Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511

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