Asset Pricing with a CEO

51 Pages Posted: 27 Sep 2020

See all articles by Paul Ehling

Paul Ehling

BI - Norwegian Business School

Alessandro Graniero

BI Norwegian Business School

Patrick Konermann

BI Norwegian Business School

Date Written: June 29, 2020

Abstract

We study an economy with a CEO who trades off the incentive to divert funds, which leads to underinvestment, against the incentive to overinvest based on his optimism. In equilibrium, we see overinvestment relative to what the shareholder or a social planner would implement but underinvestment relative to what the optimistic CEO would implement if there were no feedback between real investment and asset prices. For large wealth shares, the CEO's welfare is higher under a social planner where no funds can be diverted. For small wealth shares, overinvestment peaks and the real short-rate and Tobin's q decline.

Keywords: Optimistic CEO, Tradeoff between Overinvestment and Diversion of Funds, Tobin's q, Welfare

JEL Classification: G11, G12, E21, E22, D51.

Suggested Citation

Ehling, Paul and Graniero, Alessandro and Konermann, Patrick, Asset Pricing with a CEO (June 29, 2020). Available at SSRN: https://ssrn.com/abstract=3674022 or http://dx.doi.org/10.2139/ssrn.3674022

Paul Ehling

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

Alessandro Graniero

BI Norwegian Business School ( email )

Nydalsveien 37
Nydalen
Oslo, N-0442
Norway

Patrick Konermann (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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

Paper statistics

Downloads
41
Abstract Views
314
PlumX Metrics