Agency-Based Asset Pricing

49 Pages Posted: 21 Feb 2006 Last revised: 7 Nov 2011

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Ping He

Tsinghua University, SEM

Lixin Huang

Georgia State University

Multiple version iconThere are 2 versions of this paper

Date Written: January 23, 2008


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

Gorton, Gary B. and He, Ping and Huang, Lixin, Agency-Based Asset Pricing (January 23, 2008). Available at SSRN: or

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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P.O. Box 208200
New haven, CT 06511
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Ping He

Tsinghua University, SEM ( email )

Beijing, 100084
8610-62795754 (Phone)
8610-62784554 (Fax)


Lixin Huang

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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